CHARLES SCHWABCHARLES
Managing College Costs Hidden ETF Fees Maximizing Charitable Giving Page 7 Page 18 Page 34 ONWARD
INSIGHTS FOR CLIENTS INVESTED IN THEIR FINANCIAL FUTURES | WINTER 2019 READY FOR ANYTHING
WINTER 2019 Ready for Anything How to keep your financial plan on track—wherever the road may take you. Page 30 Dear Client,
Numerous studies have shown that those who create and stick to a financial plan achieve significantly more wealth than those without a plan. Of course, any plan is only as good as the assumptions that underpin it. If those assumptions are wrong, your goals could suffer. On page 30, we examine seven incorrect assumptions investors often make—and provide tips for addressing them.
Onward aims to provide insights that help you create and sustain a healthy financial life, so elsewhere in this issue you’ll find stories on combating increasingly sophisticated phishing scams (page 6), the impact of the Tax Cuts and Jobs Act on charitable giving (page 34) and guidance for starting a business in retirement (page 38).
If you need help creating or reevaluating your financial plan, I encourage you to reach out to us at 877-297-1126. We welcome every opportunity to help you achieve your goals.
Sincerely,
Jonathan Craig Senior Executive Vice President
See page 46 for important information. (1119-9XJK) Winter 2019 CONTENTS
5 16 27 30
DEPARTMENTS FEATURES
2 SCHWAB ORIGINALS PERSPECTIVES 27 Living Your Best Financial Life Listen, watch and learn. 13 FAQs about employer stock Founder and Chairman options. Charles R. Schwab on creating a By Chris Kawashima sustainable financial future. 3 CEO’s NOTE Learning from the best. 16 The case for actively managed By Walt Bettinger bond funds. 30 Financial Fault Lines By Collin Martin Seven faulty assumptions that could derail your savings goals— THE BOTTOM LINE 18 Ferreting out hidden ETF fees. and how to avoid them. 5 The limits of auto-enrollment By Emily Doak workplace retirement plans. 34 Give and Ye Shall (Still) Receive 6 Outsmarting new phishing 20 THE BIG PICTURE Tax reform upended the incentives scams. Market downturns are for charitable giving. Here’s how to inevitable. Your response is not. keep making a difference. 7 A collaborative approach to college costs. 23 TRADING 38 Redefining Retirement 8 The rise of actively managed How Bollinger Bands® can help Leveraging a lifetime of experience exchange-traded funds. predict a stock’s next move. can spell success for older By Lee Bohl entrepreneurs. Here are five steps 9 Making the most of workplace to get you started. benefits. 42 SPOTLIGHT Schwab Bank’s Pledged Asset Onward (ISSN 2330-3514) is published quarterly. This 11 FAMILY MATTERS Line®; Schwab Intelligent publication is mailed at Standard A postal rates. ◆ If you Beware the generation-skipping Portfolios Premium™; Schwab prefer not to receive Onward, please call 877-908-0065. ◆ ® POSTMASTER: Send address changes to Onward, transfer tax. Advisor Network . Charles Schwab & Co., Inc., P.O. Box 982600, El Paso, TX 79998-2600. Onward does not assume any liability resulting from actions taken based on the information included 48 ON YOUR SIDE in this magazine. Mention of a company or security does not constitute endorsement. Some contributors to Giving made easy. Onward may have active positions in securities or companies By Charles R. Schwab discussed in this issue. MAG105674Q419-00
ON THE COVER: ILLUSTRATION BY MICHELE MARCONI WINTER 2019 | ONWARD | 1 SCHWAB ORIGINALS
Listen Watch
In Schwab’s new Chuck Schwab reflects WashingtonWise on Schwab Charitable’s Investor™ podcast, host 20th anniversary— Mike Townsend takes plus, several generous a nonpartisan look at donors explain how the policy and political they’re using their donor- news that matters most advised fund accounts to markets—and expert to make a bigger guests share actionable charitable impact at investment insights. schwabcharitable.org/ Listen and subscribe 20stories. at schwab.com/ washingtonwise.
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A flower shop and a Fixed income barbecue joint have more @kathyjones in common than you International might think. See how @jeffreykleintop Schwab Bank’s loan Markets and economy to small-business lender @lizannsonders Opportunity Fund Personal finance creates a tangible @carrieschwab impact for underserved communities at Research aboutschwab.com/ @schwabresearch our-communities. Trading @randyafrederick
1119-9GM1
Joe Carberry Mark W. Riepe, CFA® Sara Smith Senior Vice President, Senior Vice President, Editor in Chief Communications & Schwab Center for Owned-Channel Marketing Financial Research Jeremy Hartley and Community Managing Editor Tamar Dorsey Helen Loh Vice President, Stacia Miller Senior Vice President, Brand Journalism Associate Managing Retail Client & Editor
Owned-Channel Marketing AMARGO PABLO BY ILLUSTRATIONS
2 | CHARLES SCHWAB | WINTER 2019 CEO’s NOTE
W hen I assumed the responsi- Indeed, when I asked him what I Learning bilities of CEO of The Charles should focus on during my tenure as Schwab Corporation in 2008, I knew CEO, I expected a typical response: F rom the Best I had some big shoes to fill. Chuck grow client assets, or reduce operating Schwab, as both a person and a leader, expenses, or get the stock price up. But What Chuck Schwab has is a force to be reckoned with. He Chuck isn’t your typical businessman. taught me about business— cares deeply about our clients, and “Do your part to make sure Schwab is a and people. when faced with competing business strong, independent company 50 years decisions, he will always choose the from now,” he said, “because investors one that benefits investors—even if deserve a firm that’s on their side.” that means turning our business model Our team recently sat down with on its head. Chuck to talk about what it took to build and grow the company that bears his name, as well as what he When faced thinks are the keys to becoming a with competing successful investor. Read the interview business on page 27. If I had to distill all I’ve learned decisions, Chuck from Chuck into a single sentence, it will always would be this: Doing what’s best for choose the one the client is always the right business that benefits decision. It’s such a simple idea, and yet investors. it’s ultimately what sets Chuck—and Schwab—apart.
Sincerely,
Walt Bettinger President & CEO
See page 46 for important information. (1119-9UHT)
WINTER 2019 | ONWARD | 3 Schwab Intelligent Portfolios® Automated investing with human help when you need it.
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160157_2019_Q3_OW_ADP108010OW-00_DPCM-IP_SIP.indd 1 8/21/19 5:01 PM ILLUSTRATION BY MAXIME MOUYSSET CONTENTS
RETIREMENT PLANS RETIREMENT Auto-enrollment inworkplace retirement plans couldn’t beeasier—but isit enough? which averages just 3.4%nationwide. That’s substantially lower thanthe have participation rates that exceed 90%—well above the50%foropt-in plans. A | PHISHINGSCAMS | COLLEGECOSTS |ACTIVELY MANAGED ETF Unfortunately, many savers leave their contributions set at the default rate, auto-enroll employees in workplace retirement plans such as 401(k)s ccording to research from the Pew Charitable Trusts, companies that Sure-Fire Savings WINTER 2019 | s |ANDMORE ONWARD |5 THE BOTTOM LINE
amount workers need to contribute to receive the maximum company match, which averages 5.1% nationwide.1 “And even that is about half what workers should be socking away each year to adequately fund their retirement,” says Mark Riepe, senior vice president at the Schwab Center for Financial Research. For example, imagine someone who makes $80,000 per year, contributes 3.4% to her 401(k) and receives an equal amount from the employer’s match, and earns 6% annual returns. After 30 years, she would have saved $457,657 for retirement. Increasing her contribution rate—and therefore Next-Level Phishing the employer’s match—to 5.1% would boost the total portfolio value by 50%, How to protect against increasingly to $686,486.2 sophisticated scams. However, even saving enough to get the full company match might not be raudsters are increasingly using phone calls and text adequate, Mark cautions. For example, F messages to steal logins, passwords and other personal someone who expects to withdraw information, putting people’s financial accounts at risk. $40,000 in the first year of a 30-year “The criminals are doing their homework,” says Kara Suro, retirement—and then increase their vice president of fraud surveillance and investigations at Charles withdrawals annually to account for Schwab. “They continue to find ways to trick people into providing inflation—should aim to amass a port- information via phone or text.” folio of about $1 million if they want Such schemes follow a typical pattern: The scammer sends a text to be highly confident their money message to the potential victim asking if he or she made a specific will last. “That’s why we advise saving purchase. If the victim responds “no,” the fraudster follows up with at least 10% of your annual pay, to give a phone call claiming to be from the victim’s financial institution you more cushion,” he says. “That may and asks for sensitive personal information. mean making small compromises now, If you receive this kind of suspicious communication, imme- but it will help you avoid making big diately contact the financial institution in question at a known compromises down the road.” number. At Schwab, that number is 800-435-4000. You can also NEXT protect yourself by: STEPS n Creating unique, hard-to-guess passwords—particularly for Creating a financial plan can help you financial accounts. determine how much you should actually be n Keeping login credentials secret. Schwab will never ask for saving for retirement. Start your plan with the your password over the phone—nor will most other financial help of your Schwab financial consultant. institutions. Call today to schedule an appointment. n Relying on known phone numbers and websites. Don’t assume the link or phone number in an email is authentic. Instead, initiate contact using a published phone number or website, so 1Barbara A. Butrica and Nadia S. Karamcheva, “How Does 401(K) Auto-Enrollment Relate to you can be sure you’re talking with a legitimate source. the Employer Match and Total Compensation?” n Reporting suspicious emails. If you are unsure about an email, Center for Retirement Research at Boston College, 10/2013. | 2The examples are hypo- avoid clicking any links. And if it’s suspicious and purportedly thetical and for illustrative purposes only. from Schwab, forward it to [email protected]. Contributions are made at the beginning of each month, and annual returns are compound- ed monthly. Actual rates of return will fluctuate “Vigilance is key to not becoming a victim of financial fraud,” with market conditions. Examples do not reflect the effects of taxes and fees; if they did, returns NEXT Kara says. could be lower. STEPS
See page 46 for important information. ◆ Investing involves risk, including loss of Learn more about keeping your data See page 46 for important information. (1119-9KAV) principal. (1119-9ZEL) secure at schwab.com/schwabsafe. MOUYSSET MAXIME BY ILLUSTRATIONS
6 | CHARLES SCHWAB | WINTER 2019 contributions from part-time work, Sharing the Load and fund the remaining third with a mix of loans and the like. College costs can be covered by more than just your savings. You can use a calculator like the one available at schwab.com/ A ccording to the College Board, automatically rule out schools based collegecalculator to determine just the average annual cost of on the price of admission.” how much you’ll need to sock away tuition, fees, and room and board at You can use the National Center each month in order to reach that goal. a four-year in-state public university for Education Statistics’ Net Price “Of course, every additional dollar for the 2018–2019 school year was Calculator, available at nces.ed.gov/ you can put toward your child’s college $21,370—representing a 30% increase collegenavigator, to browse published fund today—without sacrificing your from a decade earlier.1 (For private non- prices and the net cost that families retirement savings, which should profit schools, the total was $48,510, or typically pay after subtracting the always take priority—is a dollar you a 25% increase.) Multiply those costs average amount of federal, state/local or your child won’t have to borrow by four years, factor in inflation, and government, grant or scholarship aid tomorrow,” Robert says. “But however you could be looking at hundreds of from the total cost of attendance. you choose to apportion the high cost thousands of dollars per child. Then it’s time to estimate a likely of college, tapping multiple sources can But do you really need to save every combination of financial aid, savings help you successfully pursue your other last penny of the total cost of college? and out-of-pocket payments that savings goals while still keeping your Maybe not. “Thanks to financial aid, works for your family. For example, college-savings efforts on track.” grants and scholarships, many families if your child’s education will cost 1“Tuition and Fees and Room and Board over don’t pay the full published price for $100,000 in total, you could aim to save Time.” | 2How America Pays for College, Sallie college,” says Robert Aruldoss, a senior roughly a third before college, cover Mae, 2018. research analyst at the Schwab Center another third using a combination of for Financial Research.2 “So don’t your regular income and your child’s
When four becomes more What if it takes your child longer than expected to earn that undergraduate degree?
According to the National Center for Education Statistics, only 42% of stu- dents complete their undergraduate degree in four years, whereas 60% graduate by year six.* But does that mean you should be saving for more than four years? Not necessarily. Sitting for Advanced Placement® or College- Level Examination Program® tests while still in high school and taking classes at a local community college are two ways to reduce the amount you might pay for higher education. “That said, it’s always a good idea to set expectations with your child regarding how much you’re willing to help—and for how long,” Robert says. LEARN *Data is for those who began undergraduate MORE programs in 2011.
Get a jump-start on college savings with Schwab’s 529 Savings See page 46 for important information. Plan. Learn more at schwab.com/529. (1119-9E1N)
WINTER 2019 | ONWARD | 7 THE BOTTOM LINE
Proceed With Caution Actively managed ETFs are growing in popularity but carry risks.
A t first glance, actively managed the $3.4 trillion U.S. ETF market. And fund,” Michael says. “And additional exchange-traded funds (ETFs) most active ETF money is in ultra-short fees come at a cost to returns.” might seem like a contradiction. After bond funds. Risk is another factor. “In pursuit of all, most ETFs are considered passive “That’s because, with short-term greater returns, active ETF managers investments because they’re designed interest rates so low, some fixed income must, by definition, take on additional to replicate the performance of specific fund managers are assuming a bit more risk,” Michael says, “so investors will market indexes rather than outper- risk as they strive to generate additional want to take that into consideration, form them. returns,” says Michael Iachini, vice pres- as well, before seeking to beat the Active ETFs, on the other hand, rely ident and head of manager research at market.” on fund managers to select assets in Charles Schwab Investment Advisory. response to changing market condi- Should the current bull market begin See page 46 for important information. ◆ Investment returns will fluctuate and tions. Broadly speaking, their goal is to to lose strength, equity fund managers are subject to market volatility, so that an deliver returns in excess of whatever may follow suit. investor’s shares, when redeemed or sold, index they use to benchmark their But while better returns might sound may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs performance. appealing, there are other aspects to are not individually redeemable directly with While actively managed ETFs are consider. “These funds likely will have the ETF. ETF shares are bought and sold at growing in popularity—with record fees that fall somewhere between those market price, which may be higher or lower than the net asset value (NAV). ◆ Investing inflows of $27.5 billion in 2018—they of a garden-variety index fund and involves risk, including loss of principal. currently represent only about 2% of those of an actively managed mutual (1119-9P4U)
NEXT STEPS Screen for ETFs that fit your investment strategy atschwab.com/ETFscreener . ILLUSTRATIONS BY MAXIME MOUYSSET MAXIME BY ILLUSTRATIONS
8 | CHARLES SCHWAB | WINTER 2019 2. Retirement
Check whether the new company offers a 401(k) or similar workplace retirement plan—and whether there’s a company match. If so, contribute at least enough to capture the match, though you may need to kick in a lot more to reach your goals (see “Sure-Fire Savings,” page 5). Look into the pros and cons of rolling existing 401(k) funds into your new employer’s plan or an Individual Retirement Account at schwab.com/ rolloveroptions.
3. Other benefits
Determine if your new company offers life insurance, or whether you might be better off purchasing it independently. (To compare term and permanent life insurance, visit schwab.com/lifeinsurance.) If you have or plan to have children, find out whether the company offers a tax-deductible FSA for dependent care, which allows married couples filing Finders, Keepers jointly or single parents filing as heads of household to contribute up to $5,000 Are you taking full advantage of your workplace benefits? per year to cover child care expenses. Inquire about commuter benefits, I f you recently started a new job, care costs.) If your spouse or domestic such as pretax parking and transit you may not be aware of all the partner also has health care coverage, passes. benefits available to you—and thus you compare the plans to ensure you’re get- See whether the employer offers may be leaving money on the table. ting the best coverage for your money. other potentially valuable benefits, “The value of these extras—including If you’re covered by a high-deductible such as adoption coverage, low-cost retirement-savings plans, paid time off, health plan, ask whether the company legal plans or tuition reimbursement— health insurance and other benefits— offers a Health Savings Account (HSA). some employers even offer discounts can add up to about a third of your total Contributions are federally tax- on gym memberships and technology compensation,” says Robert Aruldoss, a deductible; capital gains, dividends and purchases. senior research analyst at the Schwab interest accumulate tax-free; and you Look into any employer-offered Center for Financial Research. pay no tax on withdrawals for qualified short- and long-term disability cover- Here are some common (and not-so- medical expenses. age. As with life insurance, individual common) benefits to investigate—and Also see whether the company offers disability insurance may supplement how to maximize them. a tax-deductible Flexible Spending or be a better fit than group coverage. Account (FSA), which allows you to con- (Learn more about individual disability 1. Health care tribute up to $2,700 per year1 to cover insurance at schwab.com/insurance.) certain out-of-pocket health care costs. 1 Carefully weigh your health care (Generally, individuals can contribute For married couples, each spouse may contribute up to the annual limit to her or his options, taking particular note of cov- to HSAs and FSAs simultaneously only employer-sponsored FSA. You generally must use the money in an FSA within the plan year erage, copayments and deductibles. if they are using an “HSA-compatible” or risk losing any unspent funds. (Cheaper monthly premiums don’t FSA. When used in conjunction with always pay off if they result in sub- an HSA, FSA funds may be limited See page 46 for important information. stantially higher out-of-pocket health to dental and vision expenses.) (1119-9X4F)
WINTER 2019 | ONWARD | 9 Enjoy the benefi ts of American Express with rewards tailored for Schwab investors.
Visit schwab.com/cards or call 866-912-8258 to learn more about the Charles Schwab Cards from American Express.
The Charles Schwab Cards from American Express are only available to clients who maintain an eligible Schwab account.*
Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value
The Cards under this program are issued by American Express National Bank and not Charles Schwab & Co., Inc. (“Schwab”). Schwab is the broker dealer subsidiary of The Charles Schwab Corporation. Brokerage products, including the Schwab One® brokerage account, are offered by Schwab, Member SIPC.
*The Platinum Card® from American Express exclusively for Charles Schwab and the Charles Schwab Investor Credit Card® from American Express are only available to you if you maintain an eligible account at Schwab (an “eligible account”). An eligible account means (1) a Schwab One® or Schwab General Brokerage Account held in your name or in the name of a revocable living trust where you are the grantor and trustee or (2) a Schwab Traditional, Roth, or Rollover IRA that is not managed by an independent investment advisor pursuant to a direct contractual relationship between you and such independent advisor. Eligibility is subject to change. American Express may cancel your Card Account and participation in this program if you do not maintain an eligible account.
Charles Schwab & Co. Inc., 211 Main Street, San Francisco, CA 94105 ©2019 Charles Schwab & Co., Inc., All rights reserved. Member SIPC. ADP94411Q319-00 (0619-9UU9) (5/19) 00230449 ILLUSTRATION BY FEDERICA DEL PROPOSTO how to avoid it. byestates half. nearly Here’s transfer can reduce tax generation-skippingThe Skip Tax Skipping the estate tax. is an additional 40%—on top of the transfer tax(GSTT), which in2019 the so-calledgeneration-skipping younger thanyou. That’s becauseof anyone elsewho’s at least 37.5years directly to your grandchildren—or That’s doubly true if you give assets that would otherwise gotoyour heirs. IRS could keep upto40%oftheexcess I federal estate taxexemption, the f your giftsorestate exceeds the biggest beneficiary could endupbeing then the assets passed tothechildrenand difference it would have collected had imposes theGSTT to make upforthe directly to, say, grandchildren, the IRS next. Sowhen assets aretransferred passes fromeachgeneration tothe wants tocollect itsshareaswealth taxed differently? BecausetheIRS “In cases like this, your estate’s Why areassets that skipageneration WINTER 2019 thegrandchildren. | ONWARD |11 FAMILY MATTERS
the U.S. Treasury rather than your n Alternatively, you can gift or about strategies, which can include grandchildren,” says James Madden, bequeath up to $11.4 million tax-free gifting assets while alive and/or mak- a Schwab wealth strategist based in to grandchildren—or anyone else ing charitable contributions in order Phoenix. who’s 37.5 years (or more) younger to remain within the federal estate tax To be sure, the GSTT affects only than you—after which the 40% gift exemption,” James says. the largest estates, particularly since and estate tax and 40% GSTT generally Another potential solution is to set the federal estate tax exemption was kick in. up a specialized trust. doubled in 2017. Even so, nearly 2,000 One such trust is a generation- estates paid a total of $14.93 billion in The $11.4 million exemption is skipping trust, in which assets are federal estate taxes in 2018, according actually two separate exemptions— subject to the estate tax only once: to the nonpartisan Tax Policy Center. one for gifts and estates, the other for when they’re transferred to the trust. How much of that was because of the GSTT—however, when you use a Any cash, investments or property the GSTT is anybody’s guess. But if you portion of one exemption, an equal must remain in the trust as long as have a large estate and plan to leave at amount is automatically subtracted the skipped generation is alive; how- least part of it to your grandchildren, it from the other. ever, the assets will pass tax-free to pays to understand how the tax works Here’s an example of how these the subsequent generation once the and how trusts can be used to help taxes and exemptions work. Imagine skipped generation has passed on. In minimize the tax hit. you wanted to make direct gifts of $7.7 the meantime, any income generated million each to your adult daughter and by the trust can be enjoyed by both The tax trap grandson, for a total of $15.4 million. the skipped generation and/or the According to Hayden Adams, CPA and The most tax-efficient way to do this subsequent generation, depending on director of tax and financial planning would be to apply the GSTT exemp- the terms of the trust. Such trusts can at the Schwab Center for Financial tion to the grandson’s $7.7 million gift, also protect against claims by creditors Research, there are several ways to thereby avoiding both the 40% gift and of the estate. transfer assets to someone without estate tax and the 40% GSTT. A similar trust, called a dynasty trust, getting hit with gift, estate or genera- That would reduce your remaining functions like a generation-skipping tion-skipping transfer taxes: exemption to $3.7 million, which you trust, only it can be extended indefi- could use to cover a portion of your nitely to subsequent generations. As n Throughout your life, you can use the daughter’s gift. The remainder of that with a generation-skipping trust, the annual gift tax exclusion to give up to gift—$4 million—would then be sub- beneficiaries of a dynasty trust can $15,000 per person (as of 2019) to as ject to just the 40% gift and estate tax. enjoy the income from the trust; how- many people as you like without eating The GSTT may not seem like much ever, they never gain control over the into your lifetime federal gift, estate of an issue for most estates, but the assets themselves. and generation-skipping transfer tax lifetime federal estate tax exemption Setting up a generation-skipping or exemption. could be cut roughly in half (adjusted dynasty trust involves careful consid- n You can also make direct payments to for inflation) come 2026, unless eration. Once a grantor transfers assets certain education and health care pro- Congress acts before then to extend to the trust, for example, he or she no viders for qualified tuition and medical the provision—meaning many more longer controls them, and it’s irrevoca- expenses on behalf of someone else estates could face the GSTT at some ble, meaning the grantor can’t claw the without affecting your lifetime federal point in the future. “Dramatic changes assets back once they have been placed gift, estate and generation-skipping to tax policy are always possible, in the trust. This can become an issue transfer tax exemption or your $15,000 depending on the outcome of any should a recession or other setback eat annual gift tax exclusion. given election, so it pays to think far into the funds needed to maintain the n As of 2019, you can gift or bequeath into the future when creating your grantor’s retirement. up to $11.4 million tax-free to the next estate plan,” Hayden says. Be that as it may, generation- generation—or anyone else who’s up skipping and dynasty trusts can help to 37.5 years younger than you—after The trust solution estate holders avoid being taxed more which the 40% gift and estate tax gen- “If you’re likely to face the GSTT, it can than once as assets pass from genera- erally kicks in. help to talk with a financial advisor tion to generation. n LET’S TALK
Interested in having your generation-skipping or See page 46 for important information. ◆ This information is not intended to be a substitute for dynasty trust managed by a professional? specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, financial planner or investment Call 877-862-4304 to see how Schwab Personal manager. ◆ Charles Schwab & Co., Inc. (“Schwab”) is affiliated with Charles Schwab Trust Company Trust Services can help. (“CSTC”), the corporate trustee for Schwab Personal Trust Services (“SPTS”). (1119-9U3Z)
12 | CHARLES SCHWAB | WINTER 2019 ILLUSTRATION BY SHOUT CONTENTS shares? you believe it will rise;needless tosay, keep thestock, presumably it’sbecause characteristics. stand itslong-term potentialandrisk research the fundamentals to under any prospective stock, you should your investment strategy. Aswith employer’s stock complements First, determine whether your employee stock options. shares. sense tokeep orselltheunderlying options work andwhether itmakes often confusion regardinghow stock long-term wealth. However, there’s options canbeagreat toolforbuilding part ofwhy they tooktheirjobs. than a third of employees say it’s a big recent Schwab survey foundthat more their compensation packages. Infact,a By Chris Kawashima and financialplan. can affect taxesyour employee stock options How you manage your Options Stock Employer FAQs About most common questions Igetabout 1 M hould Ikeep orsell my If you exercise your optionsand Here areanswers tothethree When managedeffectively, stock S ciate having equityaspartof any clientsIwork with appre
STOCK OPTIONS
1 | ACTIVELY MANAGED BOND FUNDS | HIDDEN ETF FEES - - stock tonomorethan20%ofyour may want tolimityour employer’s ensure you’re notoverexposed, you that’s notalways the case. To help for example, or you may have trading panies impose holding requirements, more sensetosellyour eligible shares. makes you uncomfortable, itmay make losing your job. Ifthat level ofexposure end uplosingmoney onthestock and gets intofinancial trouble, you could posure to consider: If your employer overall portfolio. of your employer’s stock. Somecom on toaninordinately largeamount under which you may needtohold That said,there arecircumstances There’s alsoanotherkindofoverex - -
price andthemarket price. the difference between the exercise period. Thevalue liesinthespread— at aspecificprice during a certain time Stock options allow you tobuy stock their value? worth—and how doIcapture risk to your overall investment strategy. your reason,make sure toconsider the of their company’s prospects. Whatever ing skininthegameandareconfident employer’s stock becausethey like hav windows that limityour abilitytosell. having largerallocations totheir 2
Conversely, some employees like WINTER 2019 What are my stock options | ONWARD |13 - PERSPECTIVES | STOCK OPTIONS
Number of Purchase Number Market Out-of- Realized/ shares price per of shares price per pocket unrealized exercised share sold share cost profit*
A Exercise and hold 2,000 $40 0 $50 $80,000 $20,000
B Exercise and sell 2,000 $40 2,000 $50 $0 $20,000 C Sell to cover 2,000 $40 1,600 $50 $0 $20,000
*Does not reflect fees or taxes. Unrealized profit is the difference between the exercise price and the current market value of any unsold shares. Some companies may not allow “sell to cover,” but rather allow tendering shares back to cover the cost (often called “net exercise”). The example is hypothetical and provided for illustrative purposes only.
For example, say you have 2,000 high earners. Therefore, the smart options with an exercise price of Chris Kawashima, move is often to pay estimated taxes $40 and a market price of $50. Your CFP®, is an equity or set aside additional money to cover compensation potential profit is $20,000 (the $10 financial planner any gap between the federal withhold- spread times 2,000 options)—and you at Schwab Private ing rate and your estimated liability. ™ commonly have three choices when it Client . Work with a qualified tax advisor for comes to realizing their value: greater clarity. On the surface, ISOs might seem like A Exercise and hold: In the example they offer employees more favorable above, you’d buy the stock and hold it, stock options (NSOs)—and the main tax treatment, but they come with a spending $80,000 up front for $100,000 difference lies in how the spread is hidden risk: Regardless of when you in stock, after which the entire amount taxed. We’ll focus on federal taxes here, sell, the spread will count as taxable would be subject to changes in market but applicable state taxes should also income when calculating the alterna- value (see table). be a consideration. tive minimum tax (AMT) in the year B Exercise and sell: This is the oppo- With ISOs, you are not typically taxed you exercise your options, which could site scenario—you’d buy the stock and when you exercise your options, but the result in a larger overall income tax immediately sell it. (Some companies spread will always be taxed when you liability. Calculating your AMT is tricky, permit a cashless exercise, in which sell your shares. If you hold the shares so be sure to consult an accountant or employee stock options are exercised for more than one year past the exercise tax advisor before exercising your ISOs. without making any cash payment date and more than two years past the using a broker-assisted short-term original grant date, the sale of the stock Do your homework loan.) Based on the numbers above, becomes a so-called qualifying disposi- you’d realize $20,000 in profit, minus tion and any realized profit is typically Equity compensation is an oppor- taxes and transaction costs (see table). taxed at the long-term capital gains tunity for you to participate in the C Sell to cover: In this middle ground, rate. If you sell earlier, the spread will future of the company you work for. It you’d buy all the stock and sell just be taxed at your ordinary income rate, can also be a great way to get into the enough of it to cover what you spent which for high earners can be as much market—so long as you understand ($80,000), plus taxes and transaction as 37% at the federal level. the tax ramifications of exercising your costs. In other words, instead of real- With NSOs, on the other hand, the options and the effect the shares could izing your $20,000 profit in cash, you’d spread is taxed as ordinary income have on your overall investment strat- realize it in stock (see table). in the year in which you exercise the egy. When in doubt, consult a financial options—even when you hold on to advisor before making any decisions. ■ 3 How are stock options the shares—and companies usually taxed? withhold some of the proceeds to 1The September 2017 survey, conducted by help pay applicable Medicare, Social Koski Research for Schwab Stock Plan Services, is based on interviews with respondents 25–70 Employees are generally granted one Security and other taxes. years old who participated in their employer’s equity compensation plan. Koski Research of two types of options—incentive Unfortunately, the typical withhold- is neither affiliated with, nor employed by, stock options (ISOs) or nonqualified ing rate is often too low, especially for Schwab Stock Plan Services. LET’S TALK
Your Schwab financial consultant can help you think See page 46 for important information. u This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning through the details of exercising your employer advice. Where specific advice is necessary or appropriate, Schwab recommends consultation stock options. Call today to schedule an appointment. with a qualified tax advisor, CPA, financial planner, or investment manager.(1119-9VVY)
14 | CHARLES SCHWAB | WINTER 2019 Filter out the noise. Focus on the facts. Barron’s ranked American Funds the #1 fund family of 2018. Based on relative performance of 57 fund families across a range of categories for the one year ended 12/31/18.*
Now available at Schwab. Find us at schwab.com/americanfunds
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Investors should carefully consider investment objectives, risk, charges, and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies. This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice. American Funds Distributors, Inc., member FINRA. * Returns are calculated before any 12b-1 fees, fund loads or sales loads are deducted. Each fund’s performance is measured against all of the other funds in its Lipper category. The result is then weighted by asset size, relative to the fund family’s other assets in its general classification. To qualify for the ranking, firms must offer at least three mutual funds or actively managed exchange-traded funds in Lipper’s general U.S. stock category, one in world equity, one in mixed asset (such as a balanced fund or target date fund), two taxable bond funds and one national tax- exempt bond fund. All funds must have a minimum track record of one year. As of last year, the ranking excludes index funds, but does include actively managed ETFs and “smart-beta” ETFS – which are run passively but built on active investment strategies. Of the 869 asset managers in Lipper’s database, 57 met this criteria. In the Barron’s ranking of the best fund families over five and 10 years for the period ended 12/31/18, American Funds ranked 6th and 17th of 55 and 49 fund families, respectively. Past results are no guarantee of results in future periods. For more details, visit http://webreprints.djreprints.com/55985.pdf.
2019_Q2_OO_PIFilterNoise-100319.indd 1 10/3/19 10:34 AM PERSPECTIVES | ACTIVELY MANAGED BOND FUNDS
n Changing credit risk: Over the Active beats passive past decade, the credit quality of the Actively managed intermediate-term bond mutual funds and exchange-traded funds corporate bonds in the Bloomberg outperformed their passive counterparts during the three, five and 10 years ending 12/31/2018. Barclays U.S. Aggregate Bond Index
has deteriorated. At the end of 2007, Active bond funds Passive bond funds 65% were rated A or higher; in 2018, 5% less than half were rated that high. 4% This may not be of immediate concern 4.6% given the index’s 39% allocation to 3% 3.4% Treasuries but could become an issue 2% 2.5% 2.6% 2.4% should that allocation shrink. 2.0% 1% n Interest rate risk: A combination returns Asset-weighted 0% of historically low interest rates and 3 years 5 years 10 years demand from the market prompted Time frame both companies and governments to Source: Morningstar. Returns are net of fees. Past performance is no guarantee of future results. issue an abundance of longer-maturity bonds over the past decade, pushing the index’s average duration to 6 years at the end of 2018—versus 4.7 during of GE bonds, with coupons ranging for the difference in fees, according to the preceding two decades. Why is that from as little as 2% to more than 7% Morningstar (see “Active beats passive,” significant? Because higher durations and maturities ranging from a few above). generally mean higher volatility when months to more than a decade. What’s In other words, sometimes you interest rates change. For example, a more, some are highly liquid, while really do get what you pay for. n bond fund with a 6-year duration will others rarely trade. An active manager generally decrease in value by 6% for can sift through all available options to every 1% increase in rates. find the ideal holding. With an actively managed bond Such expertise is even more critical fund, by comparison, the fund man- when investing in emerging-market Know your fund ager has the flexibility to buy and sell and high-yield bonds, which tend to be Credit quality and duration can bonds as needed to account for chang- both less transparent than mainstream impact the appeal of a bond fund. Here’s how you can research both by ing market forces, including credit bonds and more prone to special risks, yourself. quality and interest rates (see “Know such as fluctuating exchange rates. That your fund,” right). said, such expertise is not a guarantee Credit quality: To find information 1 Flexibility that a fund will outperform the market about the average credit quality of a The Case for Actively 2 Expertise or generate positive returns. fund’s holdings, log in to schwab.com/ Many of the biggest and most popular research, search for its ticker symbol, Managed Bond Funds U.S. bond funds track the perfor- When you invest in a bond index fund, 3 Returns click the Portfolio tab and then scroll down to the Credit Ratings section. Why their higher fees can sometimes be worth it. mance of the Bloomberg Barclays the rules of the index dictate which U.S. Aggregate Bond Index. But recent bonds are included. An active fund Although actively managed bond funds Given the deteriorating trend in the By Collin Martin market changes have eroded some of manager, on the other hand, can use typically command higher fees than credit ratings of corporate bonds, it’s worth making sure the rating of a W hen you’re looking to invest in the benefits of this broad benchmark, her or his expertise to select the bond passively managed bond index funds, a bond fund, cost is probably including: that best fits the fund’s stated goals or three categories of bond funds tracked given investment matches your risk top of mind. Indeed, that’s often what offers the most attractive yields at a by Morningstar—intermediate-term, tolerance. attracts fixed income investors to bond n Treasury overload: Due largely to given moment. corporate and high-yield—have gener- index funds, which tend to be much less the flood of federal bonds issued in the This matters because a single issuer ally delivered higher returns in recent Duration: Check the average dura- expensive than actively managed funds. wake of the 2008–2009 financial crisis, could have dozens—if not hundreds— years. For example, intermediate-term tion of a given fund under the same However, when it comes to the the index has a significantly higher allo- of different bonds available in the actively managed bond mutual funds Portfolio tab; it’ll be listed under Fixed NEXT mainstream U.S. bond market—to say cation to Treasuries than it did a decade market. Consider General Electric and exchange-traded funds outper- Income Statistics at the bottom. All STEPS nothing of riskier emerging-market ago. In 2007, U.S. Treasuries represented Company (GE). While there are only formed their passively managed things being equal, you should select a Collin Martin, CFA®, and high-yield issues—having a man- is a director of just 22% of the Bloomberg Barclays U.S. a handful of GE equities available to counterparts over the past three, five fund whose average duration matches Log in to schwab.com/ ager handpick a fund’s portfolio can fixed income at the Aggregate Bond Index; at the end of trade, there are more than 200 varieties and 10 years—even after accounting your investing time horizon. Schwab Center for fundscreener to search make sense. Financial Research. 2018, their share had jumped to 39%. for and compare bond Here are three reasons why actively Given today’s anemic Treasury yields, See page 46 for important information. u Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income funds across a variety managed bond funds may be worth such overexposure can come at a cost investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax of criteria. the extra fees. to investors in such funds. SHOUT BY ILLUSTRATION ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.(1119-9WKG)
16 | CHARLES SCHWAB | WINTER 2019 WINTER 2019 | ONWARD | 17 PERSPECTIVES | EXCHANGE-TRADED FUNDS
to buy an ETF (the bid) and the price at Hidden ETF which the market maker is willing to sell it (the ask). It’s not a fee, per se, but Fees rather a cost of investing. Bid/ask spreads are often a reflection When “low cost” could be of an ETF’s liquidity. Popular, highly higher than you think. liquid ETFs, such as those that track the By Emily Doak S&P 500® Index, tend to have very small bid/ask spreads. That’s because there’s T here’s little debate that exchange- enough demand for both the ETF and traded funds (ETFs) have democ- the underlying securities it holds that ratized investing. In addition to offering the market maker assumes little risk in access to previously hard-to-reach parts facilitating transactions. of the market (think commodities and But with less-liquid ETFs—ones precious metals), ETFs have helped amounts, active traders, in particular, that access niche areas of the market, drive down investing costs in many should pay attention to the cumulative for example—market makers may areas of the market. cost of commissions. have a harder time finding buyers and However, even relatively low fees sellers, which increases their risk of and expenses can add up over time. So 2 Expense ratios facilitating a trade. To make up for this here are three costs to consider when risk, the market maker charges you a investing in ETFs, and how to keep The expense ratio is the annual rate higher ask when you buy the ETF and them to a minimum. a fund charges to cover its operating offers a lower bid when you’re ready costs. Fund managers collect a small to sell it, effectively eating into your 1 Commissions portion of the total annual expense potential profit. The more frequently from the ETF each day. As a result, the you trade and the larger the spread on When you buy and sell ETFs, your longer you invest in a fund, the higher each transaction, the more relevant this brokerage company may charge a the cumulative cost of this fee will be. cost becomes. trading commission, which covers Also, be sure you understand the dif- the costs associated with execut- ference between an ETF’s net expense Greater transparency ing and clearing a trade. Some ratio and its gross expense ratio. The brokerage firms offer commission- former is what shareholders pay as Despite the fact that fund fees have free trades on certain ETFs, while a result of the temporary fee waivers plummeted over the past two decades, Schwab offers them on all ETFs. But if some ETF managers have introduced it still pays to do your homework. you’re paying a commission to trade to attract new investors. The latter is Spending a few extra minutes to ETFs, there are a few things to know: what shareholders pay if and when evaluate the true cost of an ETF can those waivers expire. So, if you see a fee help you make sure that headline The more often you trade, the more waiver in the prospectus, look for the fee you’re paying isn’t too good to you’ll pay in total commissions. expiration date and know that the fund be true. n Most firms charge a flat fee, so the could cost you more in the future. percentage cost will be larger for smaller trades than for larger ones. 3 Bid/ask spread If you’re buying in person or over Emily Doak, CFA, is managing director the phone, you’re likely to pay a higher When you research ETFs, it’s easy to of ETF research at commission than if you trade online. overlook the bid/ask spread, which Charles Schwab Investment Advisory. is the difference between the market Commissions are important for price at which a market maker is willing everyone to consider. But because com- missions will play a more significant See page 46 for important information. u The standard online $0 commission does not apply to large block transactions requiring special handling, restricted stock transactions, trades placed role in your total cost of ownership if directly on a foreign exchange, transaction-fee mutual funds, futures, or fixed income investments. LEARN you trade frequently or in small dollar Options trades will be subject to the standard $.65 per-contract fee. Service charges apply for MORE trades placed through a broker ($25) or by automated phone ($5). Exchange process, ADR, foreign transaction fees for trades placed on the US OTC market, and Stock Borrow fees still apply. See the Charles Schwab Pricing Guide for Individual Investors for full fee and commission schedules. u To compare ETFs by expense ratio, bid/ask All ETFs are subject to management fees and expenses. u Investing involves risk, including loss of spread, and whether they’re trading at principal. u Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Shares of ETFs a discount or a premium, log in to are not individually redeemable directly with the ETF. Shares are bought and sold at market price,
schwab.com/compareETFs. which may be higher or lower than the net asset value (NAV). (1119-9HR1) SHOUT BY ILLUSTRATION
18 | CHARLES SCHWAB | WINTER 2019 Are your international investments missing something?
Put the full power of Asia behind your investments. With over 25 years of investment experience in Asia, we aim to uncover unique companies across Asia that have the potential to benefit from consumer trends that are often overlooked in broader international and emerging markets. Find out more about our experience, insight and passion for Asia—and the role Asia can play in your portfolio—at www.matthewsasia.com/opportunity or view the Matthews Asia Funds available on the Schwab Mutual Fund OneSource Select INVEST IN OPPORTUNITY List® at www.schwab.com/matthewsasia.
Investors should consider the investment objectives, risks, charges and expense of the Matthews Asia Funds carefully before making an investment decision. This and other information about the Funds is contained at matthewsasia.com. Read the prospectus carefully. Investing involves risk including the possible loss of principal. International and emerging markets may involve additional risks including higher volatility and market illiquidity. Foreside Funds Distributors LLC. Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies and/or their affiliates in the Mutual Fund OneSource® service for recordkeeping, shareholder services and other administrative services. Schwab and Mutual Fund OneSource are trademarks of Charles Schwab & Co., Inc. and used with permission. The amount of fees Schwab or its affiliates receive from funds participating in the Mutual Fund OneSource® services is not considered in the Select List selection, or does any fund pay Schwab to be included in the Select List. Trades in no‐load mutual funds available through Mutual Fund OneSource® service (including Schwab Funds) as well as certain other funds, are available without transaction fees when placed through schwab.com or our automated phone channels. For each of these trade orders placed through a broker, a $25 service charge applies. Schwab reserves the right to change the funds we make available without transaction fees and to reinstate fees on any funds. Funds are also subject to management fees and expenses. Matthews Asia and Charles Schwab & Co., Inc. are not affiliated. ©2019 Matthews International Capital Management, LLC
Q319_OO_MatthewsAsia.indd 10 7/8/19 3:04 PM 1Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, 03/1979. | 2Schwab Center for Financial Research and Morningstar. The example is hypothetical and provided for illustrative purposes only. The portfolio was composed Do: Rebalance Don’t: Time the market of 50% stocks and 50% bonds on 12/31/2002 and was not Grin A portfolio that drifted from 50% stocks and 50% bonds to 60% stocks and By repeatedly buying and selling—as opposed to remaining rebalanced through 12/31/2007. 40% bonds over the five years leading up to the Great Recession would have invested in good times and bad—the average stock mutual fund investor consistently Stock performance represented by the S&P 500 Index and bond 2 3 and lost less if it had been rebalanced regularly. underperformed the average stock mutual fund over the past 10 years. performance represented by Bloomberg Barclays U.S. Aggregate 2002 2007 Annualized returns Bond Index. Returns assume Bear It reinvestment of dividends and Stocks Bonds Stocks Bonds interest. Indexes are unmanaged, Before ● Average stock mutual fund investor ● Average stock mutual fund do not incur management fees, Market downturns costs and expenses, and cannot be are inevitable. Your invested in directly. Rebalancing response is not. 40% a portfolio cannot ensure a profit 50% 50% or protect against a loss in any 60% given market environment. Rebalancing may cause investors Why are bear markets to incur transaction costs and, so difficult to stomach? when rebalancing a nonretirement account, taxable events may Because the pain inves- 6.6% 7.5% 11.6% 12.6% be created that may affect your tors feel from a loss is tax liability. | 3Schwab Center 5-year 10-year for Financial Research and roughly twice as power- Portfolio risk Morningstar. Fund return is the ful as the pleasure they average time-weighted return of all active funds in the Morningstar receive from an equiva- domestic equity, international and lent gain1—which can specialty stock categories. Each Do: Ignore the noise Don’t: Panic fund is represented by its oldest lead to panic selling share class. Investor return for each Despite five major market disruptions between 1997 and 2017, the diversified If investors had held on to a fund that tracked the S&P 500® Index throughout the depths of the Great and locking in losses on fund is calculated by Morningstar portfolio of a steadfast investor would have more than tripled in size.4 Recession, they would have regained all their lost ground in less than three years.5 and reflects the average return investments that might on all dollars invested based on estimated monthly net fund flows. otherwise recover. $400 1,600 Only funds with both the fund To help you keep your 2000 2008 return and the investor return During Tech bubble burst Credit crunch $350 are included in the analysis. | cool in the heat of the 1,400 4Schwab Center for Financial moment, here are three $300 Research and Morningstar. The 1998 chart illustrates the growth of a do’s and three don’ts to 2001 2003 1,200 Global $100,000 portfolio invested in 35% Terrorist Iraq invasion $250 consider before, during financial large-cap stocks (S&P 500 Index), attack 10% small-cap stocks (Russell
crisis 1,000 S&P 500 and after the next bear $200 2000® Index), 15% international market. stocks (MSCI EAFE Index [net of $150 800 taxes]), 35% bonds (Bloomberg Barclays US Aggregate Bond Portfolio value (thousands) value Portfolio Index) and 5% cash (Citigroup $100 600 3-Month U.S. Treasury Bill Index). 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2008 2009 2010 2011 2012 Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses NEXT in a declining market. | 5Schwab Center for Financial Research. STEPS Data from 12/31/2007 through Do: Stick to your plan Don’t: Miss the boat 12/31/2012. | 6Annamaria Is your portfolio Lusardi and Olivia S. Mitchell, In a study of Americans over 50, those who created and maintained a financial plan The early days of a recovery often see the greatest gains. And the longer “Financial Literacy and Planning: prepared to weather 6 7 Implications for Retirement achieved an average total net worth three times higher than those who didn’t. you sit it out, the further behind you may find yourself. Wellbeing,” p. 29, National Bureau a downturn? Call 888- of Economic Research, 05/2011. 484-5340 to discuss All rights reserved. | 7Schwab your investment Average total net worth of people who: Cumulative returns ● 1 year later ● 2 years later ● 3 years later Center for Financial Research and After Never planned Morningstar. Data analyzes the strategy with a five periods from 01/1970 through $338,418 83% 12/2017 during which the S&P 500 Schwab investment Index fell by 20% or more. Market 70% professional. Thought about planning returns are represented by the 57% S&P 500 Total Return Index, and cash returns are represented by $742,843 46% 46% 50% 41% 42% the total returns of the Ibbotson Had a plan 32% U.S. 30 Day Treasury Bill Index. See page 46 for important 29% Cumulative returns are calculated using the simple average of returns information. ◆ All $910,382 20% 13% examples herein are from each period and scenario. hypothetical and provided Had a plan and stuck to it Stayed fully Moved into Moved into Moved into The historical performance in the for illustrative purposes invested through cash for cash for cash for $1,002,975 charts shown here is no guarantee only. (1119-9UCN) KIRCHNER BEN BY ILLUSTRATIONS bear market 1 month 3 months 6 months of future results.
20 | CHARLES SCHWAB | WINTER 2019 WINTER 2019 | ONWARD | 21 Numbers tell only half the story. Your investments deserve the full story.
Strategic investing takes us beyond the numbers. That’s why over 4001 of our experts go out in the fi eld to examine opportunities fi rsthand—like how e-commerce growth is spurring demand for more innovative packaging solutions. Our rigorous approach helps us select and manage investments for our funds. Explore 33 funds on the Q3 2019 Mutual Fund OneSource Select List®. Visit Schwab.com/troweprice
Request a prospectus or summary prospectus at Schwab.com/OneSource; each includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. 1 Investment professionals as of 12/31/18. All funds are subject to market risk, including possible loss of principal, and are subject to management fees and expenses. Charles Schwab & Co., Inc., Member SIPC, receives remuneration from fund companies in the Mutual Fund OneSource® service for recordkeeping and shareholder services and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services. The amount of fees Schwab or its affi liates receive from funds participating in the Mutual Fund OneSource® service is not considered in the Select List selection, nor does any fund pay Schwab to be included in the Select List. Schwab, Mutual Fund OneSource® and Mutual Fund OneSource Select List® are trademarks of Charles Schwab & Co., Inc. and used with permission. T. Rowe Price and Charles Schwab & Co., Inc. are not affi liated. T. Rowe Price Investment Services, Inc., Distributor. D N A B
R E P P U E H T
D N A B L A R T N E C E H T
WER E LO BA TH ND
Band Aids
How Bollinger Bands® can help predict a stock’s next move. By Lee Bohl
H ave you ever gotten burned when a period of hours or days. (I typically rely tags the upper band, technical analysts a winning trade suddenly reversed on a 20-day moving average.)1 may take that as a sign the stock is course? The technical-analysis tool n The upper band is commonly set overbought and therefore ripe for a known as Bollinger Bands can help you two standard deviations above the reversal. Conversely, when the stock evaluate short-term price movements. moving average. bumps along the lower band, it could be Here’s how the bands function—and n The lower band is commonly set two a sign the stock is oversold and poised to three ways to put them to work. standard deviations below the moving move higher. average. However, some traders make the Bollinger basics mistake of treating any contact with The upper and lower bands together either the lower or upper bands as a Bollinger Bands consist of three generally contain around 90% of the trigger, when in fact the price will often elements: price action, which is what makes a “walk” the band, without a clear indica- move outside the bands significant. tion of precisely when to act. Therefore, n The central band is formed by a When the bands are relatively hori- traders would be wise to look for one of stock’s moving average—measured over zontal and the stock’s price repeatedly the following three signals.
WINTER 2019 | ONWARD | 23 TRADING
1 The Squeeze TRADING A SQUEEZE 67.00 When the gap between the outside I also use stop orders to help manage using a 20-day moving average, Signs of a squeeze: 66.00 bands narrows significantly—seem- my risk, usually just over or under the for example, you’ll want to see the 1 Bollinger Bands narrow as ingly squeezing the price—it signals opposite band. You could also use a squeeze hold up for at least four 65.00 volatility decreases. A low volatility (see “Trading a squeeze,” trailing-stop order, which will adjust weeks. Otherwise, there might not be D 64.00 To enter the trade: C A Set buy entry just above far right). the stop price up or down once your enough pent-up volatility to lead to a 62.96 1 upper band. If this persists for an extended predetermined percentage or point decisive price move. B 62.00 B Set sell-short entry just period of time, it sets the stage for an change occurs. If the stock changes Also check to see if there is any news 61.00 below lower band. increase in volatility and a decisive direction, the stop price will freeze at that could explain the squeeze, such Once in the trade: 60.00 price move in either direction. its new level—and if the stock then as a company being acquired. In such C Place initial stop above or In that event, I set a buy order just hits the new stop price, it becomes a cases, the stock could be range-bound 59.00 below opposite band. above the upper band and a sell-short market order.2 for months pending the completion D Use trailing stop to lock in 58.00 order just below the lower band, so Before you trade the squeeze, of the deal, and thus your time might gains as trade progresses. I’m taking a position whichever way though, be sure it’s persisted for a be better spent on more immediately Source: StreetSmart Edge. This example is hypothetical and for illustrative purposes only. the price moves. Once I’m in the trade, reasonable amount of time. If you’re actionable trades.
TRADING A DOUBLE 118.92 BOTTOM 2 The Double Bottom 110.00 Lee Bohl, CMT, Signs of a double bottom: is trading services 1 The first low touches or The classic double-bottom pattern Bollinger Bands, which can help manager at Charles 105.00 Schwab & Co., Inc. dips below the lower band. resembles a W, because the stock identify double bottoms in real time 2 The second low occurs sells off to a low, rallies, then tests by charting where the two lows reside above the lower band. 100.00 the previous low before rising to a relative to the lower band. To enter the trade: new short-term high (see “Trading a If the first low touches or dips A Set buy stop as price 95.00 double bottom,” left). below the lower band and the second moves above second low. While double bottoms typically low is above the lower band, it could B Set protective sell stop A 90.00 See page 46 for important information. below double bottom. occur at the end of a downtrend and signal a good time to buy—but con- u There is no guarantee that execution of a 1 2 B 85.00 signal the beginning of a potential sider having an exit strategy in place, stop order will be at or near the stop price. u uptrend, they’re hard to identify as such as a stop order placed below the Schwab does not recommend the use of technical analysis as a sole means of they’re happening—unless you use W’s bottom. investment research. u Past performance is Source: StreetSmart Edge. This example is hypothetical and for illustrative purposes only. no guarantee of future results. (1119-9AMT)
3 The Breakout 110.00 TRADING A BREAKOUT 106.43 105.00 Signs of a breakout: 1 The stock breaks higher When a stock breaks higher, the upper When the momentum starts to wane, These three signals are just a few of 100.00 A out of its previous range, band may increase too since price and the lower band will turn back up. It the ways Bollinger Bands can be used increasing volatility and volatility are both increasing. The doesn’t mean the stock will reverse, but to inform your trading, so be sure to B 95.00 pushing bands apart. 2 lower band moves in the opposite it does create some uncertainty. At that investigate additional ways to use this 90.00 As volatility wanes, direction—again, because volatility is point, I tend to take some initial profit and other trading strategies to your the lower band turns up, expanding—and will continue to do so and let the rest ride to capture any con- advantage (see “Subscribe,” left). n 2 85.00 suggesting that momentum is as long as there is strong momentum tinued growth. However, I’ll also initiate 1 slowing. 80.00 To take profits: behind the breakout (see “Trading a a trailing stop under the current price to A Take initial profit by selling breakout,” far right). close out my position if it turns lower. 75.00 part of position. 1Schwab trading clients can customize the 70.00 B Manage remaining position moving average and standard deviation with a trailing stop. 2 Subscribe Learn more about technical and fundamental trading strategies in Trading settings in StreetSmart Edge. | Note that trail- Source: StreetSmart Edge. This example is hypothetical and for illustrative purposes only. ing-stop orders aren’t available on all trading Up-Close, a new video series from Schwab. Watch at schwab.com/trading-up-close. platforms.
24 | CHARLES SCHWAB | WINTER 2019 WINTER 2019 | ONWARD | 25 Introducing Schwab Bank’s lower home loan rates. ¼% ½% ¾% interest rate discount interest rate discount interest rate discount
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In order to participate, the borrower must agree that the lender, Quicken Loans, may share their information with Charles Schwab Bank. Nothing herein is or should be interpreted as an obligation to lend. Loans are subject to credit and collateral approval. Other conditions and restrictions may apply. This offer is subject to change or withdraw at any time and without notice. Interest rate discounts cannot be combined with any other offers or rate discounts. Hazard insurance may be required. 1. For Schwab Bank Investor Advantage Pricing: Only one Investor Advantage Pricing discount eligible per loan. Purchase and refi nance loans are eligible for an interest rate discount of 0.250% - 0.750% based on qualifying assets of $250,000 or greater. Discounts available for all Adjustable-Rate Mortgage (ARM) loan sizes, and selected Jumbo Fixed-Rate loans. Discount for ARMs applies to initial fi xed-rate period only with the exception of the 1-month ARM where the discount is applied to the margin for the life of the loan. This offer is not valid on Home Equity Lines of Credit. Qualifying assets are based on Schwab and Schwab Bank combined account balances, including the following retirement account types: Traditional, Roth, Rollover, and Inherited IRAs. Clients that utilize an eligible IRA account balance to qualify for certain discounts may qualify for one special IRA benefi ts package per loan. This includes an in-depth personal fi nancial plan analysis to include a detailed review of your IRA(s) by a Certifi ed Financial Planner. This information does not constitute and is not intended to be a substitute for specifi c individualized tax, legal, or investment planning advice. Where specifi c advice is necessary or appropriate, Schwab Bank recommends consultation with a qualifi ed tax advisor, CPA, fi nancial planner, or investment manager. Clients of Independent Investment Advisors: IRA account balance eligibility is not available for clients of independent investment advisors. Qualifying assets are based on Schwab and Schwab Bank combined non-retirement account balances. Qualifying assets must be verifi ed 15 days prior to the anticipated closing for an on-time close. If the qualifying assets are deposited with less than 15 days remaining before closing, the closing date may be delayed, and eligibility to receive the interest rate discount may be affected. Clients must apply and lock the interest rate after 08/15/2019 to qualify for the discount offer. The application date will be printed on the Loan Estimate. Quicken Loans is licensed in all 50 states. Quicken Loans Inc.; NMLS #3030; www.NMLSConsumerAccess.org. Equal Housing Lender. Licensed in 50 states. AL License No. MC 20979, Control No. 100152352, AR, TX: 1050 Woodward Ave., Detroit, MI 48226-1906, (888) 474-0404; AZ: 1 N. Central Ave., Ste. 2000, Phoenix, AZ 85004, Mortgage Banker License #BK- 0902939; CA: Licensed by Dept. of Business Oversight, under the CA Residential Mortgage Lending Act and Finance Lenders Law; CO: Regulated by the Division of Real Estate; GA: Residential Mortgage Licensee #11704; IL: Residential Mortgage Licensee #4127 – Dept. of Financial and Professional Regulation; KS: Licensed Mortgage Company MC.0025309; MA: Mortgage Lender License #ML 3030; ME: Supervised Lender License; MN: Not an offer for a rate lock agreement; MS: Licensed by the MS Dept. of Banking and Consumer Finance; NH: Licensed by the NH Banking Dept., #6743MB; NV: License #626; NJ: New Jersey – Quicken Loans Inc., 1050 Woodward Ave., Detroit, MI 48226, (888) 474-0404, Licensed by the N.J. Department of Banking and Insurance.; NY: Licensed Mortgage Banker – NYS Banking Dept.; OH: MB 850076; OR: License #ML-1387; PA: Licensed by the Dept. of Banking – License #21430; RI: Licensed Lender; WA: Consumer Loan Company License CL-3030. Conditions may apply. Lending services provided by Quicken Loans Inc., a subsidiary of Rock Holdings Inc. “Quicken Loans” is a registered service mark of Intuit Inc., used under license. Charles Schwab Bank and Charles Schwab & Co., Inc. are separate but affi liated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products offered by Charles Schwab & Co., Inc. (Member SIPC) are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, and are subject to investment risk, including the possible loss of principal invested. Charles Schwab & Co., Inc. does not solicit, offer, endorse, negotiate or originate any mortgage loan products and is neither a licensed mortgage broker nor a licensed mortgage lender. Home lending is offered and provided by Quicken Loans, Inc. Quicken Loans Inc., is not affi liated with The Charles Schwab Corporation, Charles Schwab & Co., Inc. or Charles Schwab Bank. Deposit and other lending products are offered by Charles Schwab Bank, Member FDIC and Equal Housing Lender.
Charles Schwab Bank, PO Box 982605 El Paso, TX 79998-2605 ©2019 Charles Schwab Bank. All rights reserved. Member FDIC. (1119-94LH) ADP107839-00 (08/19) 00233759 Q+A Living Your Best Financial Life Founder and Chairman Charles R. Schwab on creating a sustainable financial future.
ILLUSTRATION BY JOE M KENDRY WINTER 2019 | ONWARD | 27 LIVING YOUR BEST FINANCIAL LIFE
By capitalizing on the changing investing landscape, individual savings. You have to think actively whether to own stocks; the question is which Our robo advisor Schwab Intelligent Portfolios® about saving and investing if you want to have stocks to own. But that can be a hard question can set you up with a diversified portfolio that Charles Schwab turned the then-unheard-of idea of a high quality of life. to answer. Even seasoned professionals have a best matches your goals, risk tolerance and Planning definitely takes a little time and difficult time picking the right stocks repeatedly. timeline. We also have a version—called Schwab cutting costs for Main Street investors into a brokerage effort, but it’s worth it. People who put an That’s what makes index mutual funds and Intelligent Portfolios Premium™—that includes with $3.7 trillion in assets under management today.1 investment plan in place find it much easier to exchange-traded funds so appealing. They offer planning support from professional advisors. save. And they find it easier to invest and spend a mix of investments and often have very low Onward recently sat down with Chuck to discuss in the thoughtful, informed ways that are crucial management fees. And unlike actively managed What’s your advice for young people just to success. Don’t think of plan as a four-letter funds, whose individual managers’ stock-picking starting out? his new book, Invested: Changing Forever the Way word; think of it as a seven-letter word: freedom. skills can make or break returns, index funds Americans Invest. In a wide-ranging conversation at track established benchmarks such as the S&P Young people have a huge advantage when Would you say there’s a secret to successful 500® Index or the Schwab 1000 Index®. it comes to saving and investing: time. If they his office in San Francisco, he elaborated on his secrets investing? Crashes are start saving early and contributing as much as What would you say is the best way to deal always hard to possible to tax-advantaged retirement plans, for to success, the power of equities and the ongoing evo- It’s not much of a secret: consistency and with turbulent times? stomach, but example, they’re more likely to achieve financial lution of the company that bears his name. diversification. it’s important to security in the future. The most successful investors don’t try to pre- Crashes are always hard to stomach, but it’s remember that I understand it can be daunting for dict the market’s ups and downs. Instead, they important to remember that they don’t last 20-somethings to confront important decisions Why did you write the book and what do save and invest regularly, through good and bad forever. If you look back, even the most bearish they don’t last about saving and investing that will affect their you hope readers take away from it? times, because they know stocks tend to rise over markets have eventually turned into bulls. Just forever. If you lives far into the future—including retirement. extended periods. think of the 2008 crisis: U.S. stocks fell more than look back, even Schools rarely teach why it’s so important to I thought it was necessary to record our history And you want to make sure you have a diversi- 40% in a matter of months, and some days it felt the most bearish have a purposeful financial life and how to go through my eyes. The book provides a 40-year fied portfolio so that you don’t end up putting all like the bottom would never arrive. But of course about successfully managing it. As a result, a lot portrait of how our mission was created, how your money into, say, a hamburger chain, only to it did. Had investors in a fund that tracked the markets have of people don’t understand until way too late it developed and what our purpose is as a com- find that somebody else comes along and makes S&P 500 simply remained invested, their port- eventually turned that they need to take responsibility for their pany. I hope the book will explain the founda- a better hamburger. folios would have regained all that lost ground into bulls. financial well-being. tion for what our company is today—and also If you need more proof of the value of diver- in about three years. As parents and grandparents, we need to what it will be for many years to come. sification, just look at emerging-market stocks, And look where we are now: The S&P 500 has encourage the young people in our lives to take Early on, our firm was much more transac- which outperformed all other major asset classes grown something like 140% since the start of the these first steps toward financial independence. tional. There were everyday people who wanted in 2017—but came in dead last in 2018.2 Because financial crisis.3 Every market cycle is unique, Teaching our kids and grandkids about smart to make their own investment decisions outside it’s rare that the same asset class will generate the but I believe the best course of action is to stay money management is one of the greatest gifts the conflicted brokerage business, and we facili- best returns year after year, I believe in spreading focused on the long term and remain invested we can give them. My hope is that they’ll embrace tated easy, inexpensive transactions. your investments across a range of asset classes. even when markets get rough. this gift and pass it along a generation from now.n Today, we are much more about our clients’ It’s like a financial shock absorber: It helps total financial life. We’re trying to forge a long- dampen the impact of any one investment on How do you see Schwab evolving as it 1As of 05/31/2019. | 2Schwab Center for Financial Research. Emerging-market stocks are represented by the MSCI term relationship and commitment because, your overall portfolio. approaches its 50th year in business? Emerging Markets Index. | 3Schwab Center for Financial frankly, your financial life starts when you’re Charles R. Schwab’s Finally, you want to make sure you’re in it for Research and Bloomberg. Data from 09/12/2008 to 09/12/2019. very young, and as you grow older, your needs new book, Invested: the long term. That’s important because there We’ve always been dedicated to making invest- change. We want to be there for every step of that Changing Forever the are all kinds of things that work against you if ing accessible. I wrote my first book, How to Be process. Way Americans Invest, you’re constantly buying in and out of compa- Your Own Stockbroker, back in 1984, at a time is available now at nies—from poor market timing to taxes and when trustworthy investment guidance was dif- In your book you write about what it takes retailers nationwide. transaction costs. Time in the market is more ficult to come by and self-directed investing was Learn more at to be a successful investor. What are some of important than timing the market. considered a novelty. Since then, we’ve created See page 46 for important information. u Please read the Schwab Intelligent Portfolios Solutions™ the key principles of investing you need to aboutschwab.com/ the Schwab Center for Financial Research, whose disclosure brochures for important information, pricing, and disclosures related to the Schwab understand in order to find success? invested. Where would you recommend investors put experts write many of the articles you see in this Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs. Schwab Intelligent ® ® Portfolios and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab their hard-earned savings? magazine; launched Schwab Equity Ratings to & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer. u The Schwab 1000 I think a big one is having an actionable and provide an objective way to assess securities; and Index is the property of Charles Schwab & Co., Inc. (Schwab). The Schwab 1000 Index is a float- dynamic plan that reflects your unique circum- I’m a big believer in stock investing. Companies introduced dozens of investment solutions and adjusted market capitalization weighted index that includes the 1,000 largest stocks of publicly traded companies in the United States, with size being determined by market capitalization (total stances, and that changes over time as your are made to grow. I’ve been on several boards of online tools in an effort to provide transparent market value of all shares outstanding). Schwab will modify the index as necessary to account for needs and objectives change. directors, and no company’s management has guidance and choices that don’t require a Ph.D. corporate actions (e.g., new issues, repurchases, stock dividends/splits, tenders, mergers, stock Our system of freedom and free enterprise ever come before a board and said, “We don’t in economics to understand. swaps, spinoffs or bankruptcy filings made because of a company’s inability to continue operating as a going concern). As a result of corporate actions, the index may comprise more or less than 1,000 comes with the obligation that you’ve got have a plan to grow.” That’s a fundamental thing, As I said earlier, we’re focusing more on finan- securities. Schwab may also change the Schwab 1000 Index inclusion criteria if it determines that to take care of yourself. Yes, Social Security is but it’s often overlooked. cial planning these days, which has been shown doing so would cause the index to be more representative of the domestic equity market. u The there, and you do support that throughout your Stock ownership gives people a chance to be a to help investors accumulate more savings over information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies working life by your contributions. But there’s part of that growth. So, unless you need all your time. We also believe in using technology to mentioned here may not be suitable for everyone. Each investor needs to review an investment something more important—and that’s your money in the very near future, the question isn’t lower barriers and bring investing to the masses. strategy for his or her own particular situation before making any investment decision. (1119-9U94)
28 | CHARLES SCHWAB | WINTER 2019 WINTER 2019 | ONWARD | 29 Financial Fault Lines
Seven faulty assumptions that could derail your savings goals— and how to avoid them.
30 | CHARLES SCHWAB | WINTER 2019 ILLUSTRATION BY THOMAS DANTHONY SEASON 2018 | ON INVESTING | 31 FINANCIAL FAULT LINES
Even the most Goal: Retirement what your annual out-of-pocket withdrawals than a retiree with a 20% As a result, many borrowers sud- Where appropriate, consider less health care liability might be. Also allocation to stocks while still main- denly owed more than they could expensive in-state options or nontra- disciplined planners Assumption 1: My expenses consider contributing to a health sav- taining the same degree of confidence hope to recover in a sale. And many ditional means of earning a degree, like will be lower in retirement. ings account (HSA), if your employer that her money would last 20 years.2 had to wait years for the market to having your child complete her or his can face unexpected offers one. Contributions to HSAs are → Course correction: “A 60% allo- recover before they could consider general education requirements at a → Reality check: “Many retirees find tax-deductible, their assets typically cation to stocks in retirement isn’t for selling their homes, which may have community college before transferring hurdles. they spend just as much money in grow tax-free, and withdrawals are everyone,” Rob says. “But you do need compromised their ability to accept to a more prestigious institution to retirement as they did while they were also tax-free, so long as they’re used for some exposure to stocks if you want to employment opportunities elsewhere. complete their studies. Your career takes a turn for the still working. Plus, most want to travel qualified medical expenses. generate income and maintain growth → Course correction: First and fore- Finally, consider a balanced and pursue other passions, and those You may want to investigate long- potential. Holding a mix of assets with most, view your home as a place to approach to paying for college that worse or your child’s education is things cost money,” David says. You’ll term care insurance options, as well, varying risk levels can help support live—not primarily as an investment utilizes a combination of financial costlier than you’d expected and, also need to account for unexpected since the number of Americans need- those goals.” on a par with stocks and bonds. Real aid, parent and student income, and expenses and other costs, such as health ing long-term services and support A financial planner can help you estate prices in high-demand markets savings (see “Sharing the Load,” page 7). just like that, your savings goals care, not all of which will be covered by is expected to nearly triple, from 10 create an approach that accounts for may rise quickly, but the majority of can be in jeopardy. “People often Medicare (see Assumption 2, below). million in 2010 to 27 million by 2050.1 multiple rates of return and retirement homes will take many years to appreci- What’s more, average life expectancy scenarios. He or she can also help you ate enough to recoup your closing and Prepare for change operate under the presumption in the U.S. increased by roughly eight Assumption 3: I’ll be able assess how much risk makes sense for any improvement costs. of control,” says David Jamison, years between 1970 and 2017, so your to work as long as I want your specific situation. Above all, buy within your means, When it comes to your own planning, money may simply need to last longer or need to. don’t put more money into a property it’s important to revisit your assump- a CERTIFIED FINANCIAL PLANNER™ than that of previous generations. than you can reasonably expect to tions on a regular basis—at least → Course correction: When esti- → Reality check: Nearly 8 million Goal: First home recover and try to eliminate any mort- annually, and ideally with a financial professional with Schwab mating your retirement savings goal, older Americans are in search of work gage debt before you retire. advisor who can bring a fresh perspec- Intelligent Services. assume your current expenses will or stuck in low-quality jobs, according Assumption 5: I can deduct tive to your assumptions. remain the same, minus the amount to a 2018 analysis by The Wall Street the interest on my mortgage. “Time is your friend when it comes “Unfortunately, failing to expect you’re saving annually toward retire- Journal. Goal: College to saving money,” David says. “So the the unexpected can leave you ment. From there you can calculate → Course correction: Rerun your → Reality check: Because of recent earlier you can spot a potential flaw your target portfolio size, as well as savings projections assuming early changes to the tax code, you can Assumption 7: Education in your planning assumptions, the far short of your desires.” Here, how much you’ll need to save each retirement and/or relatively low-wage deduct the interest only on up to debt is always worth it. easier it is to make the necessary course then, is the reality behind seven year in order to reach your goal. Also work in retirement. $750,000 of mortgage debt, and corrections.” n tally up any surprise expenses from “Many people take as a given they’ll interest paid on a home-equity loan → Reality check: Mounting student assumptions savers often make— the past several years and incorporate be able to work as long as is necessary (HELOC) is deductible only if the debt has been cited as one of the main an annual average into your final or desirable,” David says. “But your proceeds were used to purchase or reasons why so many young adults Need help with your planning and solutions that can help keep NEXT projections. health or circumstances may not substantially improve your primary today can’t afford to buy homes or assumptions? Call your Schwab STEPS you from being caught short. Finally, factor in inflation and life allow for the level of earnings you were or secondary residence. start families. Moreover, a record 8.9 financial consultant today to expectancy. (You can run the numbers counting on, so be careful not to be → Course correction: Be realistic million federal student loan borrowers schedule an appointment to review using an online calculator like the one overly reliant on work when it comes about your mortgage-interest deduc- were in default in 2017, with a million your financial plan. at schwab.com/retirementcalculator.) to your financial projections.” tion when evaluating the true annual more borrowers expected to default If any of the outcomes give you pause, cost of your home—especially if every year.4 consider revisiting your savings rate or Assumption 4: I should play you’re counting on it when calculat- “College debt is a growing prob- 1Financing Long-Term Services and Supports: Seeking Bipartisan Solutions in Politically Challenging Times, Bipartisan Policy Center, strategize now on potential cutbacks. it safe with my investments ing the amount of tax that’s withheld lem for parents, too—especially 07/11/2017. | 2Sustainable withdrawal rates are calculated using in retirement. from your paycheck. Also be sure to when it comes at the expense of Monte Carlo analysis. The asset allocation is assumed to be constant for the designated time period. Withdrawals increase by a constant Assumption 2: Medicare will double-check the IRS’s rules on eligi- their retirement savings,” David 2.20% rate of inflation. Returns and withdrawals do not consider cover my health care costs. → Reality check: Although a conser- bility if you’re expecting to deduct the says. Indeed, 14% of families who the effect of taxes. Portfolio-level nominal returns and standard deviations are 6.03% and 8.85%, respectively, for the portfolio with vative retiree’s portfolio might be 20% interest on your HELOC. borrowed to pay for college in 2018 60% equities and 40% cash/fixed income and 3.69% and 3.24%, → Reality check: Medicare doesn’t equities and 80% cash/fixed income, used parent loans exclusively, accord- respectively, for the portfolio with 20% equities and 80% cash/ fixed income. For illustrative purposes only. Results may vary with cover many of the health care expenses “a greater allocation to stocks can Assumption 6: Real estate is ing to Sallie Mae.5 each use and over time. | 3Ruth Mantell, “Home prices off record always a safe investment. → Course correction: 18% in past year, Case-Shiller says,” marketwatch.com, 12/30/2008. retirees will encounter, including help offset the risk of outliving your Higher educa- | 4Student Debt and the Class of 2017, Institute for College Access & most dental, vision and hearing care. savings,” says Rob Williams, CFP® and tion isn’t all about return on investment, Success, 09/2018. | 5How America Pays for College, 2018. Perhaps more important, you have to vice president of financial planning → Reality check: Like any asset, home but you should nevertheless discuss pay out of pocket for any long-term at the Schwab Center for Financial prices can go down as well as up. In with your child what her or his choice See page 46 for important information. u This information is care, unless you obtain supplemental Research (SCFR). October 2008, for example, home of major could mean in terms of salary not intended to be a substitute for specific individualized tax, insurance in advance. Indeed, an analysis by SCFR found prices plunged a record 18% year over potential—and hence their ability to legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified → Course correction: Review what’s that a retiree with a 60% allocation year, as measured by the Case-Shiller pay back student debt—as well as how tax advisor, CPA, financial planner or investment manager. covered at medicare.gov and estimate to stocks was able to take larger 20-city composite index.3 much you’re willing to contribute. (1119-9PXS)
32 | CHARLES SCHWAB | WINTER 2019 WINTER 2019 | ONWARD | 33 … Ye… (Still) Shall
Tax reform upended the incentives for charitable giving. Here’s how to keep making a difference.
Receive Give Give and … and
ILLUSTRATIONS BY GIACOMO BAGNARA WINTER 2019 | ONWARD | 35 GIVE AND YE SHALL (STILL) RECEIVE
Taxpayers who routinely make annual dona- rate. Both of these developments mean To offset the loss of their charitable These accounts also make it easier to Maximum control taxpayers will capture less tax savings tax deduction, they decided to hold donate bonds, exchange-traded funds, tions to charity face a new hurdle: They may from their charitable contributions. off on their 2018 cash contribution mutual funds, stock and other invest- Of all the itemized deductions available What’s more, a $10,000 cap on the and bundled two years’ worth of ments—and potentially deduct the to taxpayers, the charitable deduction no longer be able to deduct their gifts. deduction of state and local taxes (SALT) charitable donations—$20,000—in full fair market value without having is perhaps the most flexible. Donors has resulted in a higher tax bill for 2019. Adding in their $9,000 in other to pay tax on any capital gains. can control the amount, timing and Why not? Because the number charitable deduction by allowing many residents of high-tax states such deductions will exceed the standard “For a lot of charities, it’s very cum- type of donations in order to maximize of taxpayers who itemize their high-income earners to take even as California and New York. This not deduction of $24,400 in 2019, allowing bersome to receive a share of stock their impact—to both the charity and deductions—including charitable larger charitable deductions than in only reduces their disposable income them to itemize and capture a signifi- here and a share of stock there—and themselves. “To give may be better donations—is expected to decrease by the past. For example: but also makes it that much harder to cant tax savings. some aren’t equipped to accept such than to receive,” Kim says, “but that roughly two-thirds1 as a result of the exceed the standard deduction and Of course, bundling multiple con- gifts at all,” Kim says. “Donating doesn’t mean you shouldn’t take full Tax Cuts and Jobs Act of 2017 (TCJA), ■ It increases the amount of deductible therefore itemize their charitable con- tributions into a single year can feel appreciated assets to a donor-advised advantage of the tax code.” n which doubled the standard deduction cash contributions taxpayers can make tributions. (Even those who do itemize daunting if you’re not sure how much fund, on the other hand, is seamless, to $12,200 in 2019 for individuals and to charities, from 50% of their adjusted are unlikely to see as significant a tax you want to give and to whom. So to with fund administrators handling 1“Tables Related to the Federal Tax System as in Effect 2017 through 2026,” The Joint Committee on Taxation, 04/23/2018. | $24,400 for married couples filing gross income to 60%. savings as they did in the past, because build some flexibility into your plan, all the processing and reporting 2“TPC Microsimulation Model, version 0217-1,” Urban-Brookings jointly. ■ It eliminates the Pease limitation, many deductions—including alimony you may wish to set up a donor-ad- requirements.” Tax Policy Center, 2018. The effects may already be taking which capped how much taxpayers payments and unreimbursed business vised fund account, which allows you What’s more, the money can con- hold: The percentage of households could claim in the way of itemized expenses—were reduced or eliminated to donate a lump sum in the current tinue to appreciate once invested in Learn more about maximizing your NEXT that itemized their charitable contribu- deductions if their incomes were over as part of the TCJA.) tax year, invest the funds for future a donor-advised fund account, which charitable impact with Schwab STEPS tions declined from 21% in 2017 to just certain thresholds. That said, many taxpayers subject to growth and parcel out the money to means the potential for even greater Charitable’s donor-advised fund 9% in 2018, according to estimates from the standard deduction can still benefit qualified charities over time. giving down the road. account at schwabcharitable.org. the nonpartisan Tax Policy Center.2 The downside from their charitable donations, so “Tax benefits are a secondary moti- long as they go about it in a slightly TCJA takeaways vation for many donors—but they’re more methodical way. still a motivation,” says Kim Laughton, The downside Upsides Downside president of Schwab Charitable, The joys of bundling the nonprofit donor-advised-fund Percentage of households provider sponsored by The Charles Standard deduction for single filers: Standard deduction for married couples filing jointly: that itemized their Schwab Corporation to facilitate charitable contributions: client giving (see “Giving Made Easy,” page 48). Several provisions in the TCJA make 2017 2017 21% in 2017 The good news is that for many the tax charitable giving considerably less $6,350 $12,700 benefits of charitable giving remain— advantageous from a tax perspective. provided you know how to navigate In addition to the doubling of the the new tax landscape. Here’s a look standard deduction, tax rates have “Most people who give don’t do so in at how the TCJA has made giving more been lowered for five of the seven order to get something in return— advantageous in some ways and less income brackets—and brackets have they’re philanthropically inclined,” 2019 2019 so in others, and how taxpayers can also shifted, meaning in many cases Kim says. Even so, how can taxpayers $12,200 $24,400 continue to benefit both others and more income will be taxed at a lower benefitting from the new tax law also themselves. get back some of the tax advantages 9% in 2018 of their charitable contributions? One The upside word, Kim says: “Bundling.” Deductible cash contributions taxpayers can make to charities: Essentially, this means combining perhaps several years’ worth of 2017 50% adjusted gross income donations into a single tax year so that—along with your other deduc- How can taxpayers tions—you exceed the standard 2019 60% adjusted gross income deduction. (You’d take the standard benefiting from deduction in the interim years.) the new tax law also For example, imagine a couple who See page 46 for important information. u This article addresses gifts of appreciated non-assets that have been held for more than a year. The tax deduction, “The TCJA did not cap or eliminate the earmarked $10,000 for charity in 2018. for those who itemize, for noncash gifts to a public charity or donor-advised fund account may be used to offset up to 30% of adjusted gross income and can be get back some of carried forward for five years. The donor must file IRS Form 8283 when claiming an itemized deduction for contributed securities valued at greater than $500. charitable deduction, which shows the tax advantages That plus the rest of their deductions For gifts other than cash and publicly traded securities in excess of $5,000 ($10,000 for closely held stock), the donor must also obtain a qualified appraisal. that lawmakers were not looking to added up to $19,000—far more than u Donors should consult with their tax advisor to determine the appropriate holding period. Under the Tax Cuts and Jobs Act of 2017, carried interest income from u penalize donors,” Kim says. of their charitable the standard deduction of $12,700 in investments held for less than three years may be taxed as a short-term capital gain. Gifts of appreciated property can involve complicated tax analysis and advanced planning. The above article is meant only to be a general overview of some of the considerations and is not intended to provide tax or legal guidance. In fact, in some ways the tax law contributions? One 2017 but far less than the post-TCJA Please consult with your tax advisor. u Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund™, an independent actually enhances the value of the word: Bundling. standard deduction of $24,000 in 2018. nonprofit organization. The Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.(1119-9VHC)
36 | CHARLES SCHWAB | WINTER 2019 WINTER 2019 | ONWARD | 37 Redefining
etirement for older entrepreneurs.
Leveraging a lifetimeHere of experience are five steps can Junspellto get Cen success you started. RIllustration by WINTER 2019 | ONWARD | 39 REDEFINING RETIREMENT
retirement (noun) Step 1: Plan for a small-business loan? Traditional ® ri-ˈtī(-ǝ)r-mǝnt financing is typically easier to secure If you’re funding the business even because it doesn’t require a formal Schwab Bank’s Pledged Asset Line : the action or fact of leaving one’s job partially out of your own pocket, make business plan or a specific use case, Leveraging the value of your assets rather than liquidating them can be a smart strategy. sure you have a clear plan for balancing but it can be riskier because it ties your Pledged Asset Line, make and ceasing to work amounts start at $100,000 sure you understand the risks. your personal expenses with your personal finances to the health of your your portfolio while helping → If you need access to (with a required minimum Schwab Bank, in its sole business expenses. business. Small-business loans, on the maintain your investing capital but are hesitant to initial advance of $70,000). discretion, will determine at Julia Acer, a financial advisor at other hand, can be separate from your strategy. To learn more about liquidate part of your portfolio The nonpurpose line of any time the eligible collateral Schwab Private Client Investment personal finances but undergo a more Schwab Bank’s Pledged because of tax consequences, credit is secured by assets held criteria and the loan value of Advisory who’s based in Phoenix, rigorous approval process and may be concerns about selling during Asset Line, turn to page 42 collateral. in a separate Pledged Account or call your regional banking suggests dividing existing assets into limited to established businesses. a temporary market decline or and required to be maintained buckets. “Carve out a portion to sup- A third option is to pursue a other considerations, it might manager at 888-577-7040. *A nonpurpose line of credit may not at Charles Schwab & Co., Entering into a Pledged be used to purchase securities, pay port the business, but make sure you’re nontraditional line of credit, such as make sense to borrow against Inc. You can use your line of Asset Line and pledging down margin loans or be deposited protecting those funds earmarked for a pledged asset line, which lets you your assets to fund your goal. credit to fund a wide range into any brokerage account. Proceeds A Pledged Asset Line from securities as collateral involve must be used for a lawful personal, retirement and any legacy you hope to borrow against the value of your non- of business expenses, such commercial, or business purpose under Schwab Bank is a flexible, a high degree of risk. Before or some retirees, it may be time to retire the leave behind,” she says. retirement assets while keeping your * that as new equipment, startup state, federal, or other applicable law. nonpurpose line of credit you decide to apply for a word retirement. A financial planner can help you investment strategy on track. costs, payroll and more. Line lets you leverage the value of Indeed, for the decade ending in 2024, the determine how much you can afford “A pledged asset line may be a good Bureau of Labor Statistics predicts a 55% rise to invest in a new business without fit for someone who requires access in labor participation among those 65 to 74 upending your near- and long-term to capital but doesn’t want to sell any years old and an 86% increase for those 75 goals. investments,” Ken says. “It’s a flexible in which they are managed, owned and remittances, along with various taxes and an attorney—who can handle and older—compared with an increase of Financial planners can also help borrowing solution that can be used taxed. LLCs, for example, are generally such as excise, sales and use taxes. “You the nitty-gritty. “Many times a new just 5% for the labor force as a whole during clients assess the potential tax con- for just about any purpose related to quite easy to set up and have fewer can get into a whole bunch of financial business will try to cut corners by the same period.1 sequences of working in retirement. the business, from paying monthly formal requirements. C and S corpo- trouble if you start a business without going it alone, but that can expose you “More and more of our clients are looking Medicare and Social Security, for expenses to purchasing land.” (For rations, on the other hand, have many knowing the federal, state and local tax to unforeseen risks and cost you down to remain active in retirement,” says Marcela example, both have income thresholds more, see “Schwab Bank’s Pledged more legal, tax and other strictures. rules. That’s why a good tax advisor is a the road,” Hayden says. Garcia, a Schwab senior financial consultant above which either additional premi- Asset Line®,” above right.) Hayden also suggests considering must for any business owner,” Hayden Translating a lifelong dream into a in Los Gatos, California. “That often includes ums or increased taxes must be paid. liability insurance as an additional says. successful enterprise can be tricky, to setting up a small business in a field they IRS-mandated required minimum Step 3: Protect safeguard against unforeseen inci- be sure, but it often starts with the right couldn’t pursue sooner because they had a distributions from your tax-deferred dents, such as a guest becoming injured Step 5: Hire advice. “We can help to provide frame- family to support during their earning years. savings accounts beginning at age “A lot of people think setting up a while staying at a bed and breakfast. works for success,” Julia says. “In my Now, they want to venture into something 70½ can also add to your income, with business is just a matter of hanging No novice business owner is expected experience, the more focused an older that’s really close to their heart.” potentially negative tax consequences. out a shingle—and that can be a big Step 4: Prepare to know every detail up front. A good entrepreneur’s vision and mission are, One couple Marcela works with stands mistake,” says Hayden Adams, CPA and financial planner can offer higher-level the more successful her or his business Fout. They retired with a comfortable invest- Step 2: Fund director of tax and financial planning Another potential pitfall is inadequate guidance on topics such as taxes, insur- will likely be.” n ment portfolio and moved from California at the Schwab Center for Financial tax planning. Starting a business can ance and even best business practices, to Idaho, where some neighbors got them Some prospective business owners Research. “You should consider filing expose owners to new taxes they while pointing you toward other 1“Older workers: Labor force trends and career interested in the local real estate market. may consider selling real estate or documents that treat your business as may not have anticipated, including specialists—including an accountant options,” 05/2017. “They found it so engaging that they began drawing upon savings for startup a separate legal entity.” estimated taxes paid quarterly. dabbling in higher-end real estate projects capital. Others may contribute cars, For example, many small businesses By the same token, a small busi- See page 46 for important information. themselves—and the business just took off,” securities or other assets directly to the begin as a sole proprietorship, but ness can open up tax deductions she says. “They’re in their 70s, and they’re business itself. that could lead to your personal assets unavailable to those who don’t own BROKERAGE PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE having a grand old time.” If you’re not planning to tap being used to settle business debts or businesses, such as the cost of setting Entering into a Pledged Asset Line and pledging securities as collateral involve a high degree of risk. At any time, Even those with knowledge of the indus- your savings or don’t have sufficient even a lawsuit. “If somebody sues your up a home office and travel expenses. including in the event that the loan value of collateral is insufficient to satisfy the minimum loan value of collateral or to support the outstanding loans, Schwab Bank may demand immediate payment of all or any portion of the try or business environment they’re enter- resources to fund your business, you business and it’s not structured prop- And if you choose to structure your outstanding obligations, or require additional cash or securities to be added to the Pledged Account maintained ing into may find that their past experience might need to consider borrowing. erly, they could potentially take your business as a pass-through entity, such at Charles Schwab & Co., Inc. If a Demand is not addressed, the pledged securities may be immediately liquidated isn’t enough, since there can be blind spots Taking on new debt in retirement has car, house or hard-earned savings,” as an S corporation, you may qualify without further notice to you, which may result in tax consequences. u This offer is subject to change or withdrawal at any time and without notice. Nothing herein is or should be interpreted as imposing an obligation to lend. around funding, insurance, taxes and other its risks, so it’s important to explore all Hayden says. Registering a business as for additional deductions—but you Pledged Asset Lines are subject to credit and collateral approval. Other conditions and restrictions may apply. u issues. Fortunately, a financial advisor can available options, fully understand the a limited liability company (LLC) or a C also may be subject to additional tax- Charles Schwab & Co., Inc. and Charles Schwab Bank are separate but affiliated companies and subsidiaries of The help fill in the blanks. terms of the loan and have a solid plan or an S corporation, on the other hand, reporting requirements. Consulting an Charles Schwab Corporation. Brokerage products, including the Pledged Account, are offered by Charles Schwab & Co., Inc., Member SIPC, and are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, “It’s really about doing your homework,” for paying it back. can help protect the owner’s assets in accountant or tax advisor can help you and are subject to investment risk, including the possible loss of principal invested. Deposit and lending products, says Ken Szymanski, a managing director at For example, will you pursue the event the company is sued. to make the most of both situations. including the Pledged Asset Line, are offered by Charles Schwab Bank, Member FDIC and an Equal Housing u Charles Schwab Banking & Trust Services. traditional financing, such as a home All three entities aid in protecting In addition, many businesses will Lender. Charles Schwab Bank is not acting or registered as a securities broker-dealer or investment advisor. This information does not constitute and is not intended to be a substitute for specific individualized tax, legal or “Take the time to understand the effort and equity line of credit (HELOC) or a owners personally from the liabilities of need to prepare to pay employment investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation resources necessary for success.” personal loan, or will you try to qualify the business, but they differ in the ways taxes and make Social Security with a qualified tax advisor, CPA, financial planner or investment manager.(1119-9JKH)
40 | CHARLES SCHWAB | WINTER 2019 WINTER 2019 | ONWARD | 41 SPOTLIGHT FROM Looking for a Smarter Way SCHWAB BANK to Borrow?
Schwab Bank’s Pledged In a world of bills and financial opportunities, flexibility is a must. Whether ® you’re buying a new home, investing in your business or paying a tuition or Asset Line is a flexible line tax bill, you don’t want your ambitions to get stuck in a bottleneck. of credit that allows you to borrow against the assets With a Schwab Bank Pledged Asset Line you may be able to avoid some of the challenges that can arise when you need funds quickly—from the time in your portfolio. and effort that can go into securing a traditional loan, to the potential tax consequences of selling assets—by borrowing against the value of your portfolio.
These non-purpose1 lines of Collateral for your flexible line of credit are: credit may include:
• Flexible. Line amounts from • Marginable equity securities $100,000 (required minimum initial valued at or above $3/share at the advance of $70,000). time of funding and closing. • Convenient. Quick lending • Most mutual funds and decisions, whether applying online exchange-traded funds. or with a representative. • Certificates of deposit and cash. • Affordable. Competitive rates with • Many corporate, Treasury, no set-up fees or pre-payment municipal, and government agency penalties. bonds.
Retirement assets are not eligible.
Entering into a Pledged Asset Line and pledging securities as collateral involve a high degree of risk. At any time, including in the event that the loan value of collateral is insufficient to satisfy the minimum loan value of collateral or to support the outstanding loans, Schwab Bank may demand immediate payment of all or any portion of the outstanding obligations, or require additional cash or securities to be added to the Pledged Account maintained LET’S TALK at Charles Schwab & Co., Inc. If a Demand is not addressed, the pledged To learn more, talk with your securities may be immediately liquidated without further notice to you, which Schwab financial consultant may result in tax consequences. or call 888-725-3630.
Schwab Bank requires that the assets pledged as collateral for the Pledged Asset Line be held in a separate Pledged Account maintained at Charles 1A non-purpose line of credit may not be used to purchase securities, pay Schwab & Co., Inc. (Schwab). Schwab Bank, in its sole discretion, will down margin loans, or be deposited into any brokerage account. Proceeds determine at any time the eligible collateral criteria and the loan value must be used for a lawful personal, commercial, or business purpose under state, federal, or other applicable law. of collateral.
Brokerage Products: Not FDIC-Insured • No Bank Guarantee • May Lose Value
This offer is subject to change or withdrawal at any time and without notice. Nothing herein is or should be interpreted as imposing an obligation to lend. Pledged Asset Lines are subject to credit and collateral approval. Other conditions and restrictions may apply. u Charles Schwab & Co., Inc. and Charles Schwab Bank are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products, including the Pledged Account, are offered by Charles Schwab & Co., Inc., Member SIPC, and are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, and are subject to investment risk, including the possible loss of principal invested. Deposit and lending products, including the Pledged Asset Line, are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender. Charles Schwab Bank is not acting or registered as a securities broker-dealer or investment advisor. u ©2019 Charles Schwab Bank. All rights Reserved. Member FDIC. Equal Housing Lender. (1119-90ZR)
42 | CHARLES SCHWAB | WINTER 2019 SPOTLIGHT PRODUCTS The Power of a Plan
Get a roadmap for your financial future with planning guidance from Schwab Intelligent Portfolios Premium™.
Everyone has financial goals. Maybe it’s making sure you have enough income for a long retirement or setting up an estate plan that provides for your family. Maybe it’s leaving a legacy for your alma mater. Maybe it’s all three.
But regardless of your goals, properly investing your assets in a cost-conscious way can help ensure you get there. And here’s where Schwab Intelligent Portfolios Premium can make a difference. Our robo-advisor builds, monitors and LET’S TALK automatically rebalances a diversified portfolio based on Ask your Schwab financial consultant to help you your goals. Plus, you’ll receive planning and unlimited 1:1 get started or visit schwab.com/portfoliospremium ™ guidance from a Certified Financial Planner professional. to learn more.
Planning guidance at your your financial plan as your life fee, billed quarterly, to What else you should know fingertips changes, you’ll better position receive ongoing access to a yourself to meet your goals. team of planning We believe cash is a key Your Schwab Financial consultants to address component of an Consultant will connect you Backed by our commitment updates to your plan and investment portfolio. Based with a Schwab CFP® to keeping costs low answer questions as needs on your risk profile, a professional who will work in arise—as well as interactive portion of your portfolio is partnership to establish a You’ll pay a one-time online tools. placed in an FDIC-insured financial plan customized to planning fee of $300 for an You’ll invest in a portfolio deposit at Schwab Bank. your financial situation and initial consultation with a of low-cost exchange- Some cash alternatives needs. With their guidance, CFP professional, which traded funds. Just as if outside of the program pay you’ll get recommendations includes a customized you’d invested on your own, a higher yield. See more for a low-cost investment financial plan with portfolio you will pay the operating information below.* strategy that can work both recommendations. expenses on the ETFs in now and in the future. By After 90 days, you pay a your portfolio, which staying engaged and updating $30 per month advisory includes Schwab ETFs™.
*There is no advisory fee or commissions charged for Schwab Intelligent Portfolios. For Schwab Intelligent Portfolios Premium, there is an initial planning fee of $300 upon enrollment and a $30 per month advisory fee charged on a quarterly basis as detailed in the Schwab Intelligent Portfolios Solutions™ disclosure brochures. Investors in Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium (collectively, “Schwab Intelligent Portfolios Solutions”) do pay direct and indirect costs. These include ETF operating expenses which are the management and other fees the underlying ETFs charge all share- holders. The portfolios include a cash allocation to a deposit account at Schwab Bank. Our affiliated bank earns income on the deposits, and earns more the larger the cash allocation is. The lower the inter- est rate Schwab Bank pays on the cash, the lower the yield. Some cash alternatives outside of Schwab Intelligent Portfolios Solutions pay a higher yield. Deposits held at Schwab Bank are protected by FDIC insurance up to allowable limits per depositor, per account ownership category. Schwab Intelligent Portfolios Solutions invests in Schwab ETFs. A Schwab affiliate, Charles Schwab Investment Management, receives management fees on those ETFs. Schwab Intelligent Portfolios Solutions also invests in third party ETFs. Schwab receives compensation from some of those ETFs for providing shareholder services, and also from market centers where ETF trade orders are routed for execution. Fees and expenses will lower performance, and investors should consider all program requirements and costs before investing. Expenses and their impact on performance, conflicts of interest, and compensation that Schwab and its affiliates receive are detailed in the Schwab Intelligent Portfolios Solutions disclosure brochures.
Brokerage Products: Not FDIC-Insured • No Bank Guarantee • May Lose Value
See page 46 for additional information. u Please read the Schwab Intelligent Portfolios Solutions disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs. (1119-9RV5)
WINTER 2019 | ONWARD | 43
SPOTLIGHT Get the Help You Need With We can help you find an independent advisor from our pre-screened SERVICES Schwab Advisor Network list of specialized wealth management firms around the country.
Whether as a result of Experienced advisors Building a personalized the steady accumulation dedicated to helping plan for your total of wealth over time you grow and preserve financial picture, not or a sudden windfall your wealth just your investments such as an inheritance, there can come a point Schwab Advisor Network is a Once you’ve decided on a when your wealth select group of approximately Schwab Advisor Network advisor, 200 independent advisory firms they will develop a customized management needs nationwide, whose advisors we plan for you that addresses your become so complex have pre-screened for investment individual needs. These advisors that you would prefer management experience, assets can provide professional personalized attention under management and guidance in areas such as: from a financial advisor. professional education. Advisors in the network have 20 years of • Investment management But how to find the experience, on average, and • Financial planning right mix of specialized many hold advanced professional • Insurance expertise, investment certifications, such asCERTIFIED ™ management philosophy FINANCIAL PLANNER , Chartered $500,000 • Tax strategies Financial Analyst® or Certified investment and personal connection • Estate planning Public Accountant, among other minimum • And other areas, depending that are so essential designations. to a successful advisor on your needs relationship? Before referring you to an advisor, your Schwab financial consultant No fee Schwab Advisor Network advisors will talk with you about your for advisor can take over day-to-day Schwab can help needs and identify advisors who referral management of your investment can bring the right kind of portfolio and broader wealth by referring you to expertise to bear for your management needs, and as third-party situation. Your Schwab financial fiduciaries, they are committed to professionals in the consultant will continue to be Asset- helping you accomplish your Schwab Advisor your main contact at Schwab based fees goals. They’ll also check in with ® even after you’ve established a vary by you periodically to update you on Network . relationship with a third-party advisor your progress and discuss any advisor. adjustments you need to make. After all, life happens, and your plans have to change accordingly.
NEXT STEPS But the support doesn’t stop To lear n more about Schwab Ad v isor there. Your independent advisor Net wor k and discus s your wealt h can also work with your lawyer or management needs, contact your accountant, and, depending on Schwab financial consultant or call the third-party firm, bring in See page 46 for important information. u Schwab Advisor Network (“SAN”) member advisors are independent and are not employees or agents of Charles Schwab & Co., 877-656-8749. in-house specialists on taxes, Inc. (“Schwab”). Schwab prescreens advisors and checks their experience and credentials against criteria Schwab sets, such as years of experience managing investments, estate planning and other areas— amount of assets managed, professional education, regulatory licensing, and business relationship as a client of Schwab. Advisors pay fees to Schwab in connection with that means you can have access referrals. Schwab does not supervise advisors and does not prepare, verify or endorse information distributed by advisors. Investors must decide whether to hire an advisor and what authority to give the advisor. Investors, not Schwab, are responsible for monitoring and evaluating an advisor’s service, performance and account transactions. to an entire wealth management Services and fees may vary depending on which advisor an investor chooses. (1219-9ALL) team working on your behalf.
44 | CHARLES SCHWAB | WINTER 2019 WINTER 2019 | ONWARD | 45 IMPORTANT DISCLOSURES
The information provided here is for general informational purposes plan; or taking a cash distribution (taxes and possible withdrawal only and should not be considered an individualized recommendation penalties may apply). Prior to a decision, be sure to understand the or personalized investment advice. The investment strategies benefits and limitations of your available options and consider factors mentioned here may not be suitable for everyone. Each investor needs such as differences in investment related expenses, plan or account to review an investment strategy for his or her own particular situation fees, available investment options, distribution options, legal and before making any investment decision. creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from Pg. 16–17: None of the information constitutes a recommendation third-party providers is obtained from what are considered reliable by Schwab or a solicitation of an offer to buy or sell any securities. sources. However, its accuracy, completeness or reliability cannot be Supporting documentation for any claims or statistical information is guaranteed. available upon request. ◆ All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, Examples provided are for illustrative purposes only and not intended offer to sell, or a solicitation of an offer to buy any security. ◆ to be reflective of results you can expect to achieve. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, Pg. 8: Fixed income securities are subject to increased loss of principal geopolitical risk, foreign taxes and regulations, and the potential for during periods of rising interest rates. Fixed income investments are illiquid markets. Investing in emerging markets may accentuate these subject to various other risks including changes in credit quality, market risks. valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.◆ Charles Schwab Investment Pg. 16–17, 20–21: Indexes are unmanaged, do not incur management Advisory, Inc. (“CSIA”) is an affiliate of Charles Schwab & Co., Inc. fees, cost or expenses, and cannot be invested in directly. (“Schwab”). Pg. 16–17, 30–33: The Schwab Center for Financial Research is a Pg. 9: This information does not constitute and is not intended to be a division of Charles Schwab & Co., Inc. substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab Pg. 30–33: Diversification and asset allocation strategies do not ensure recommends consultation with a qualified tax advisor, CPA, financial a profit and cannot protect against losses in a declining market. planner, or investment manager. ◆ A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available Pg. 43: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios options which may include but not be limited to keeping your assets Premium™ are made available through Charles Schwab & Co. Inc. in your former employer’s plan; rolling over assets to a new employer’s (“Schwab”), a dually registered investment advisor and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation. ◆ The cash allocation in Schwab Intelligent Portfolios Solutions™ will be accomplished through enrollment in the Schwab Intelligent Portfolios Sweep Program (Sweep Program), a program sponsored by Charles Schwab & Co., Inc. By enrolling in Schwab Intelligent Portfolios Solutions, clients consent to having the free credit balances in their Schwab Intelligent Portfolios Solutions brokerage accounts swept to deposit accounts at Charles Schwab Bank through the Sweep Program. Charles Schwab Bank is an FDIC-insured depository institution affiliated with Charles Schwab Find this issue and & Co., Inc. and Charles Schwab Investment Advisory, Inc. ◆ Schwab ONLINE archives of Onward at Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are designed to monitor portfolios on a daily basis and will also schwab.com/onward. automatically rebalance as needed to keep the portfolio consistent with the client’s selected risk profile. Trading may not take place daily. ◆ Charles Schwab & Co., Inc. and Charles Schwab Bank are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products, including the Schwab One brokerage account, are offered by Charles Schwab & Co., Inc., Member SIPC. Deposit and lending products are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender.
Index Definitions Bloomberg Barclays U.S. Aggregate Bond Index is a market-value- weighted index of taxable investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage- backed securities, with maturities of one year or more. ◆ Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
©2019 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (1119-9KWF)
46 | CHARLES SCHWAB | WINTER 2019 Our fixed income funds were in the top half of their Lipper classification over the 10-year period1
81%
IS YOUR FIXED INCOME TRULY FIXED INCOME? Even in volatile markets, fixed income strategies should aim to deliver the essentials: diversification, income and risk management. Does yours? At MFS®, we’ve held an unwavering belief in Essential Fixed Income — our focus on rigorously researched credit that’s guided us for over 40 years. To view a list of MFS funds that are available without a transaction fee or load through the Schwab Mutual Fund OneSource® service, please visit www.schwab.com/MFS.
1 Source: Lipper as of 6/30/19, based on Class A shares at NAV and Class A assets. Keep in mind that a high relative ranking does not always mean the fund achieved a positive return during the period. Lipper rankings do not take into account sales charges and are based on historical total returns, which are not indicative of future results.. Past performance is no guarantee of future results. Keep in mind that all investments, including mutual funds, carry a certain amount of risk, including the possible loss of the principal amount invested. Trades in no load funds available through Mutual Fund OneSource® service, as well as certain other funds, are available without transaction fees when placed through schwab.com or our automated phone channels. Schwab’s short-term redemption fee of $49.95 will be charged on redemption of funds purchased through Schwab’s Mutual Fund OneSource® service and held for 90 days or less. Schwab reserves the right to exempt certain funds from this fee, including Schwab Funds®, which may charge a separate redemption fee, and funds that accommodate short-term trading. Funds are also subject to management fees and expenses. Charles Schwab & Co., Inc., member SIPC, receives remuneration from fund companies participating in Schwab’s Mutual Fund OneSource® service for record keeping, shareholder services and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services. Schwab Mutual Fund OneSource® is a registered mark of Charles Schwab & Co., Inc. and used with permission. MFS and Charles Schwab & Co., Inc. are not affiliated. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Before investing, consider the fund’s investment objectives, risks, charges, and expenses. For a prospectus, or summary prospectus, containing this and other information, contact your investment professional or view online at Schwab.com/OneSource. Please read it carefully.
MFS Fund Distributors, Inc., Boston, MA MFSP-SCHOIM4-AD-8/19 42940.2 ON YOUR SIDE Giving Made Easy
Schwab Charitable turns 20.
I n the late 1990s, it became clear to me that invest the proceeds for growth, and recommend grants investors needed a tool to help streamline to their favorite charities via an easy-to-use online plat- their charitable giving. Our clients needed a solution form. You can read more about using a donor-advised that allowed them to approach their philanthropy as fund on page 34. thoughtfully and effectively as they did their invest- The impact our clients have made over the years ments and savings. is profound. Since Schwab Charitable’s inception, So, in 1999 we established Schwab Charitable, a donors have given $13 billion to 150,000-plus charities national donor-advised fund and independent pub- worldwide. If you’re looking for a simple, tax-smart lic charity that helps clients maximize their giving approach to your philanthropy, learn more about through tax-efficient planning. Using their Schwab Schwab Charitable at schwabcharitable.org. We’d be Charitable accounts, donors can contribute cash and happy to help you define your charitable mission and appreciated assets they’ve held for more than one year, support the causes you care about most.
Charles R. Schwab Founder & Chairman
See page 46 for important information. u Schwab Charitable Fund is recognized as a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code. Contributions made to Schwab Charitable Fund are considered an irrevocable gift and are not refundable. Please be aware that Schwab Charitable has exclusive legal control over the assets you have contributed. Although every effort has been made to ensure that the information provided is correct, Schwab Charitable cannot guarantee its accuracy. This information is not provided to the IRS.u Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization. The Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation. 1119-9US9)(
48 | CHARLES SCHWAB | WINTER 2019 With the foundation you leave them, imagine what they’ll build.
Whatever they decide to build, we’ll be here as a corporate trustee to administer your trust according to your terms. We’ll help you put everything in place so that your interests and benefi ciaries are taken care of—so your legacy lives on the way you planned it.
Call your fi nancial consultant or visit personaltrust.schwab.com to learn more about Schwab Personal Trust Services.
Charles Schwab & Co., Inc. (“Schwab”) is affi liated with Charles Schwab Trust Company (“CSTC”), the corporate trustee for Schwab Personal Trust Services (“SPTS”). Neither Schwab nor CSTC provides legal or tax advice. Consult with your legal counsel and tax advisors about your particular circumstances. ©2019 Charles Schwab Trust Company. All rights reserved. CC3139690 (1119-9TWB) ADP107763-00 (08/19) 00233537
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I’ve never been a teacher.
But I know I can make A Schwab Charitable™ donor-advised fund account is a a difference. tax-smart, efficient way to help meet your charitable giving goals. To learn more or to open an account, call us at 800-746-6216 or visit www.schwabcharitable.org.
Giving is good. Giving wisely is great.
A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation. Consult your tax advisor for more information. Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund™, an independent nonprofit organization. Schwab Charitable Fund has entered into service agreements with certain subsidiaries of The Charles Schwab Corporation. ©2019 Schwab Charitable Fund. All rights reserved. REF (1019-9N50)
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